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QUESTION:

(b) Find the optimal investment portfolio in the risky assets. What are the mean and s.d. of the returns of this portfolio?

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 1997 -- December 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 () 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? F G H Expected Monthly Return Expected Monthly Return PG 0.010848 Microsoft 0.014854 0.011589 Exxon 0.012043 BAC PG Microsoft BAC Exxon Variance Variance 0.004478 0.012820 0.005611 0.002820 Covariance Cov(PG, Microsoft) Cov(PG, BAC) Cov(PG, Exxon) Cov(Microsoft, BAC) Cov(Microsoft, Exxon) Cov(BAC, Exxon) -0.000649 0.000683 0.000433 0.001681 0.000804 0.000757 optimal investment portfolio in the risky Weight PG Microsoft BAC x Exxon 1.000000 E[r] Portfolio Variance Std Dev Sharp 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 1997 -- December 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 () 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? F G H Expected Monthly Return Expected Monthly Return PG 0.010848 Microsoft 0.014854 0.011589 Exxon 0.012043 BAC PG Microsoft BAC Exxon Variance Variance 0.004478 0.012820 0.005611 0.002820 Covariance Cov(PG, Microsoft) Cov(PG, BAC) Cov(PG, Exxon) Cov(Microsoft, BAC) Cov(Microsoft, Exxon) Cov(BAC, Exxon) -0.000649 0.000683 0.000433 0.001681 0.000804 0.000757 optimal investment portfolio in the risky Weight PG Microsoft BAC x Exxon 1.000000 E[r] Portfolio Variance Std Dev Sharp

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