Question

Portfolio analysis

4. Suppose you form a portfolio that invests 10% in T, 20% in JPM, 30% in NEM and 40% in CVX. Calculate (a) portfolio monthly returns, (b) portfolio's average monthly return, and (c) standard deviation of portfolio monthly returns. Discuss. Highlight your final answers.

Average Return E (r) of each stock: The average return on each of these stocks were calculated in excel using today's price-yesterdays price/yesterday's price and then the average taken from 114 days of adj. closing cost.

Ave. Return E(T)=0.85% StDEV(T)=4.46%

Ave. Return(JPM)=1.36% StDEV(JPM)=6.94%

Ave.Return E(NEM)=0.60% StDEV(NEM)10.30%

Ave. Return E(CVX)=0.90% StDEV(CVX)5.74%

Weight

WW(T)=10%

W(JPM)20%

W(NEM)30%

W(CVX)40%

E (r)ptf = W(T)*E(T) + W(JPM)*E(JPM) + W(NEM)*E(NEM)+ W(CVX)*E(CVX)

******I calculated in excel and got these answers: Is the E(r)ptf the portfolio monthly returns or the average monthly return? How do you calculate the (a) portfolio montly returns and (b) the average monthly return?

E(r) ptf=0.90%

StDEV(r) ptf=2.51%

Answer 1

Expected return E(r) actually means the average return, Expectation is a measure of the averaging. Here in this equation, we are using expected return (average returns ) of the stocks. It is crystal clear that the return of the portfolio using average returns of the containing stocks will also be an average measure.

E (r)ptf = W(T)*E(T) + W(JPM)*E(JPM) + W(NEM)*E(NEM)+ W(CVX)*E(CVX)

=( 0.1*0.85%)+ (0.2*1.36% )+(0.3*0.60%)+(0.4*0.9%)= 0.897%=0.9%

For calculating monthly return of the portfolio, first of all, you have to calculate daily return of the portfolio and sum up them all to get the monthly return. For calculating daily return of the portfolio, you have to calculate each stocks daily returns and multiply them with the respective weight. Like wise you can have the return of the portfolio in daily frequency, all this daily return were added (for a particular month) together to arrive for the monthly return.

Daily (r)ptf = W(T)*R(T) + W(JPM)*R(JPM) + W(NEM)*R(NEM)+ W(CVX)*R(CVX)

here R is the daily return of the respective stocks

Do this for all the available trading days in a month and sum up all to arrive at the monthly return of the portfolio.

Let me know your response