Internal tests of portfolio recommended to Kim & Rich, especially mean-variance portfolio optimization (6-10 pages, excluding appendices).
The objective of this assignment is to apply mean-variance analysis to the portfolio of firms you put together for the couple of the previous assignment (Client 2009-02: Kim and Rich). These are the steps to follow according to internal company protocols:
1. The sample
Build a sample of security returns for the recommended firms. You will need to a) obtain stock prices, monthly, for at least five years. You may get stock price quotes from http://www.yahoo.com. Then, you use EXCEL to calculate stock returns (see “returns-calculations” page in the aforementioned spreadsheet). Two formulas commonly used are rt = (pt – pt-1)/ pt-1, and rt = ln(pt/pt-1), where “ln” stands for the natural logarithm.
a) Calculate mean-variance risk and return indicators (average returns, variances and covariances).
b) Calculate the tangent portfolio (see page “tangent” in ias09-meanvar.xls).
c) Comment on the results –you decide what merits comment.
d) Extra-credit: Calculate some optimal portfolios (short sales, and no short sales) and draw the efficient frontier. (See page “qp-rp” in ias09-meanvar.xls).
3. Concentrate on the tangent portfolio for this part.
a) Do optimal portfolio weights reflect the fundamentals you have observed? (That is, explain whether companies with strong fundamentals have large optimal portfolio weights).
b) In general, do you think portfolio theory is useful?
c) In the particular case of your sample (time, economic situation, specific choice of securities), do your think portfolio theory helps?