This enterprise’s perform is to kind a portfolio with 2 harmful property (2 widespread shares) and 1 risk-free asset (1-year Treasury Funds), and calculate the optimum portfolio weights amongst these property.
Resolve 2 shares you are interested in investing (They’re typically any stock, as long as they’re widespread shares listed on NYSE/Nasdaq/Amex). For each of the stock, do the following:
(1) Obtain its 5-year historic every day prices (1/1/2015 – 12/31-2019) on Yahoo finance and calculate its every day holding interval returns.
(2) Generate a summary statistics report on its holding interval returns.
(three) Create a Histogram chart on its holding interval returns.
(4) Estimate its annualized volatility using the entire holding interval returns from (1).
(5) Use the S&P 500 holding interval returns all through the similar interval as market return, run a regression to estimate the beta of this stock. Y: stock return minus risk-free worth. X: market return minus risk-free worth. You must make the most of 1.5% as risk-free worth.
(6) As quickly as beta is estimated, calculate the anticipated return of this stock using CAPM. Consistent with CAPM, Anticipated return = Rf + beta*(Rm-Rf). Observe that Rf must be an annual return, Rm should even be an annualized return, which can be calculated using widespread of every day S&P 500 returns partially (5) multiplied by 252.
(7) Use the anticipated return and annualized volatility you estimated partially (4) and (6), simulate every day stock prices for the next 252 days, assuming stock prices adjust to Geometric Brownian Motion.
(eight) Sort a portfolio with every shares and risk-free asset. Estimate the correlation coefficients between two shares. Use this parts =CORREL(HPRs of stock1, HPRs of stock 2)
(9) Set a objective portfolio return, use Solver to estimate the optimum weights for all property in your portfolio. (Tip: In case your solver is unable to offer you a solution, ponder altering your objective portfolio return to a additional life like amount, as an example, if every your shares have anticipated returns spherical 10% based on CAPM, setting a objective portfolio return of 20% will almost certainly not work.)