I am considering investing in a portfolio of stocks. I have examined historical performance and gathered the following information for a set of six stocks I am considering (S1-stock1, S2-Stock 2....) Covariance matrix (joint risk) S1 S2 .005 S2 S3 S4 S5 S3 S4 S5 S6 .03 -.031 -.027 .01 .085 -.07 -.05 .02 -0.11 -0.02 .042 .05 -0.06 -0.02 Annual return S1 S2 S3 S4 Annual return 0.2 0.42 1.0 .5 S5 .46 S6 .3 Volatility 0.18 0.32 0.58 0.35 0.25 0.28 a) I am very risk averse, so I would like to determine how to construct a portfolio with very little risk. What percentage of my portfolio should be invested in each stock if I would like to keep the risk (variance of the portfolio) below .02? Create a spreadsheet model and solve. Write a sentence explaining how I should invest my money and what return I should expect to achieve. The sentence can be included on the Excel sheet that contains the solution. b) Now I would like to consider how much risk I would have to accept if I would like a return that is 10% better than the solution found in part a. Create a spreadsheet model and solve. Write a sentence explaining how I should invest my money and what risk level would be required to achieve that return. The sentence can be included on the Excel sheet that contains the solution. Please note I would like two separate spreadsheets (one for part a and one for part b), but you should be able to copy and paste things from one sheet to the other to avoid have to retype a lot of things.
I am considering investing in a portfolio of stocks. I have examined historical performance and gathered the following information for a set of six stocks I am considering (S1-stock1, S2-Stock 2....) Covariance matrix (joint risk) S1 S2 .005 S2 S3 S4 S5 S3 S4 S5 S6 .03 -.031 -.027 .01 .085 -.07 -.05 .02 -0.11 -0.02 .042 .05 -0.06 -0.02 Annual return S1 S2 S3 S4 Annual return 0.2 0.42 1.0 .5 S5 .46 S6 .3 Volatility 0.18 0.32 0.58 0.35 0.25 0.28 a) I am very risk averse, so I would like to determine how to construct a portfolio with very little risk. What percentage of my portfolio should be invested in each stock if I would like to keep the risk (variance of the portfolio) below .02? Create a spreadsheet model and solve. Write a sentence explaining how I should invest my money and what return I should expect to achieve. The sentence can be included on the Excel sheet that contains the solution. b) Now I would like to consider how much risk I would have to accept if I would like a return that is 10% better than the solution found in part a. Create a spreadsheet model and solve. Write a sentence explaining how I should invest my money and what risk level would be required to achieve that return. The sentence can be included on the Excel sheet that contains the solution. Please note I would like two separate spreadsheets (one for part a and one for part b), but you should be able to copy and paste things from one sheet to the other to avoid have to retype a lot of things.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:I am considering investing in a portfolio of stocks. I have examined historical performance and
gathered the following information for a set of six stocks I am considering (S1-stock1, S2-Stock
2....)
Covariance matrix (joint risk)
S1
S2
.005
S2
S3
S4
S5
S3
S4
S5
S6
.03
-.031
-.027
.01
.085
-.07
-.05
.02
-0.11
-0.02
.042
.05
-0.06
-0.02
Annual return
S1
S2
S3
S4
Annual
return
0.2
0.42
1.0
.5
S5
.46
S6
.3
Volatility 0.18
0.32
0.58
0.35
0.25
0.28
a) I am very risk averse, so I would like to determine how to construct a portfolio with very little
risk. What percentage of my portfolio should be invested in each stock if I would like to keep
the risk (variance of the portfolio) below .02? Create a spreadsheet model and solve. Write
a sentence explaining how I should invest my money and what return I should expect to
achieve. The sentence can be included on the Excel sheet that contains the solution.
b) Now I would like to consider how much risk I would have to accept if I would like a return
that is 10% better than the solution found in part a. Create a spreadsheet model and solve.
Write a sentence explaining how I should invest my money and what risk level would be
required to achieve that return. The sentence can be included on the Excel sheet that
contains the solution.
Please note I would like two separate spreadsheets (one for part a and one for part b), but you
should be able to copy and paste things from one sheet to the other to avoid have to retype a lot of
things.
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