finance

7.5 What does it mean to say that portfolio weights sum to 1.0 or 100 percent?

7.8 Evaluate this statement: With regard to portfolio risk, the whole is not equal to the sum of the parts.

7.15 Should investors generally expect positive correlations between stocks and bonds? Bonds and bills? Stocks and real estate? Stocks and gold?

7.16 What are the inputs for a set of securities using the Markowitz model?

Excel exercise

7.3 Fill in the spreadsheet below to calculate the portfolio return and risk between Zenon and Dynamics, given the 10 years of annual returns for each stock and portfolio weights of 50/50.

How would your answer change if the weights were 40 percent for Zenon and 60 percent for Dynamics?

How would your answer change if the weights were 30 percent for Zenon and 70 percent for Dynamics?

	Zenon	Dynamics
Expected return
Variance
Standard deviation
Covariance
Weight for Zenon	50%
Weight for Dynamics	50%
Expected portfolio return
Portfolio variance
Portfolio standard deviation

Zenon return	dynamics return
9.89	-47.67	2018
-12.34	30.79	2017
13.56	24.78	2016
34.56	7.89	2015
-15.23	24.42	2014
20.09	34.56	2013
7.56	67.56	2012
16.47	44.67	2011
18.34	78.56	2010
15.56	51	2009

8.1 Consider a diagram of the efficient frontier. The vertical axis is ________. The horizontal axis is ________, as measured by the ________.

8.3 Why do rational investors seek efficient portfolios?

8.6 What does it mean to say that combining the efficient frontier with indifference curves matches possibilities with preferences?

8.12 How well does diversification work in reducing the risk of a portfolio? Are there limits to diversification? Do the effects kick in immediately?

Excel Chart

8.1 Closing prices for SilTech and New Mines for the years 2003–2018 are shown below.

a) Calculate the return for each stock for each year to three decimal places.

b) Assume that similar returns will continue in the future (i.e., average returns = expected returns). Calculate the expected return, variance, and standard deviation for both stocks and insert these values in the spreadsheet. Use AVERAGE, VAR.S, and STDEV functions.

c) Calculate the covariance between the two stocks.

d) Using the 11 different proportions that SilTech could constitute of the portfolio ranging from 0 to 100 percent in 10 percent increments, calculate the portfolio variance, standard deviation, and expected return.

e) Plot the trade-off between return and risk for these two stocks based on the calculation in (d). Use the XY scatter diagram in Excel.

	SilTech	NewMines
2018	198.08	21.634
2017	84.84	34.867
2016	71.89	44.67
2015	32.2	49.8
2014	10.69	49.55
2013	7.16	46.86
2012	10.95	53.11
2011	7.44	48.75
2010	25.7	63.12
2009	10.23	37.04
2008	3.28	31.67
2007	5.22	21.78
2006	7.97	14.45
2005	9.64	9.39
2004	7.13	14.99
2003	14.39	10.72