Fi 4000 Case Report

546 words - 3 pages

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Finance 4000 |
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Project One |

1a) This report was created to analyze and evaluate historical daily data of four companies. These daily data was obtained from yahoo finance website. The provided data includes daily adjusted closing prices of four companies: Apple, Wal-Mart, Microsoft and GE. From given data I calculated the average daily returns and standard deviations for each company, which is represented below:

1b) By using daily returns for entire period I prepared correlation matrix for firms. A correlation coefficient tells us what percentage of two assets’ price movements are driven by the same market forces. Below is correlation matrix of four companies:

1c) I analyzed the data above to find the highest and lowest correlations among all firms. My results showed that Wal-Mart has highest (0 .291) ...view middle of the document...

The lower the correlation between two stocks the greater the diversification benefit, the lower the risk of portfolio that combines them. When two stocks move more oppositely, their returns will tend to offset one another in most states, causing a return of a portfolio combining them to be less volatile.

2a)I collected 10 years of historical monthly data of Amazon and Yahoo stocks. From these adjusted closing prices, I calculated monthly returns and standard deviation of monthly returns for each stock. After I got my monthly returns and standard deviation I converted them to annual values by using formulas. Formulas that were given are below:
Annualized Mean Return= (1+Monthly Mean Return) ^12-1
Annualized Standard Deviation= Monthly Standard Deviation *square root of (12)
Calculation results are presented below:

2b)By using my annual returns and standard deviations I calculated correlation coefficient of the returns of two stocks. Deriving from my calculation these two stocks have low correlation of 0.1762. Since they have low correlation return, I combined these two stocks using every possible weighting between the two stocks in discrete of 1% increments to calculate their expected return and volatility. After I got my results for expected returns and standard deviation of the portfolio, I calculated their Sharpe Ratio using risk free rate of 2%. Table below shows, the correlation between two stocks, and the highest Sharpe ratio:

2c) Amazon has expected return of 34.91% and standard deviation of 40.58%, on other hand Yahoo has 6.69% in expected return and standard deviation of 34.15%. I created optimal risky portfolio using this two stocks and graphed the IOS. Since correlation between two stocks is 0.1762, our graph will look like a c shape. The IOS is graphed below:

Covariance | Variance | Beta |
0.001781385 | 0.001436233 | 1.24031754 |
  | Coefficients |
Intercept | 0.000624029 |
X Variable 1 | 1.24031754 |

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