For this assignment, please use excel file group_assignment_1_portfolios.xls posted on blackboard...

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For this assignment, please use excel file group_assignment_1_portfolios.xls posted on blackboard under the folder of Excel Files. The file contains the monthly returns of 4 stocks over the 10 year period -- January XXXXXXXXXXDecember 2006. In this file, the expected monthly return for each stock is calculated using excel function AVERAGE (), for each stock, the variance of monthly returns is calculated using Excel function VAR (), and the covariance between the returns of each pair of stocks is calculated using Excel function COVAR (). Assume that the yearly risk free rate is 2% (A monthly risk free rate of XXXXXXXXXXa) Plot the minimum variance frontier for an investor who wants to allocate his money to PG, BAC, and the risk-free asset. Find the optimal risky portfolio. What are the mean and s.d. of the returns of this portfolio? For questions (b), (c), and (d), we assume that investors invest in the risk-free asset and 4 risky assets (PG, Microsoft, BAC, and Exxon).(b) Find the optimal investment portfolio in the risky assets. What are the mean and s.d. of the returns of this portfolio?

Kushal · Accepted Answer

Portfolio return = w1 * r1 + w2* r2 + w3 * r3
Here,  w1, w2,  and w3 are the weights of the three asset classes in the portfolio and r1,  r2 and r3 are the returns of the respective asset classes. 
Standard deviation formula for the portfolio is given by this, 
σP = (wA2σA2 + wB2 σB2 + wC2σC2 + 2wAwBσAσBρAB + 2wBwCσBσCρBC + 2wAwCσAσCρAC)1/2
Where,
σP = is the portfolio standard deviation;
ωB = weight of asset B in the portfolio;
σA = standard deviation of asset A;
σB = standard deviation of asset B; and
ρAB = correlation coefficient between returns on asset A and asset B.
ρBC = correlation coefficient between returns on asset B and asset C.
ρCA = correlation coefficient between returns on asset C and asset A.
As per the modern portfolio theory,

For this assignment, please use excel file group_assignment_1_portfolios.xls posted on blackboard under the folder of Excel Files. The file contains the monthly returns of 4 stocks over the 10 year...

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