Diversification and Portfolio Risk (Security Analysis and Portfolio Management)

Instructions:
1.  Download 5-years (2 January 2009  – 2  January 2014) of monthly stock price
history for two large market capitalisation stocks from Yahoo Finance
(click the Investing tab followed by the Historical  Prices tab). Create a time
series of monthly returns from this time series of monthly stock prices.
Calculate the annualised mean return, standard deviation and correlation
of the stocks.
2.  Use investment proportions for the two stocks ranging from zero to 100% using
intervals of 10%. Tabulate and draw the investment opportunity set of the
two stocks
3.  Calculate the weights on the minimum variance portfolio consisting of the two
stocks, wh ich we denote by stock X and stock Y, using the following
formulae

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4.  Calculate the expected return and standard deviation of this minimum variance
portfolio. Plot the two assets and the minimum variance portfolio on a
diagram and plot the efficient fron tier consisting of portfolios made up of
these two assets.
5.  Obtain the 5-year risk free rate. Draw a tangent from the risk – free rate to the
opportunity set. Identify the expected return and standard deviation of the
optimal portfolio?

6.  Calculate t he performance measures such as Sharpe ratio, Treynor ratio etc.
for each of the portfolios. Identify the portfolio with the high est reward -to -volatility ratio.
7.  Include in your report an in troduction, a method section, a results section
and conclusions.
8.  Discuss in your report diversification referring to the expected return and
standard deviation of the minimum-variance portfolio in your answer.

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