Hello, I have been struggling with the problem for a while now. Can someone please assist?...

Hello, I have been struggling with the problem for a while now. Can someone please assist? I cannot find the data online much less calculate the standard deviation.

1. Go to finance.yahoo.com and find them monthly rates of return over a 2 year period for five companies of your choice. Now assume you form each month an equally weighted portfolio of five firms (a portfolio with equal investments in each firm). What is the rate of return each month on your portfolio? Compare the standard deviation of the monthly portfolio return to that of each and to the average standard devation across the five firms. What do you conclude about the portfolio diversification?

Solutions

Expert Solution

Go to finance yahoo's page on any stock, then go to historical data and select time period of 2 years, along with frequency as monthly, and download it as an excel sheet. Make sure no stock splits or bonuses were given out for that time period (otherwise stock prices would need to be adjusted).

For your convenience, i've done Amazon, Microsoft, Twitter, Facebook and Apple.

For portfolio construction, you need to assign equal weights by multiplying each stock's price by 0.2 and adding the sum of each.

The return on each month is given by (price in month - price in preceding month) / price in preceding month.

Once the returns are calculated in percentage terms, just run the standard deviation formulas on each stock along with the portfolio.

See how it looks in excel:

So the standard deviation of returns of portfolio is 5.42% while the average of the stocks individually gives 7.17%.

Thus we can conclude that diversification leads to lowering of risk.

Sources

https://finance.yahoo.com/quote/AMZN/history?period1=1467311400&period2=1532802600&interval=1mo&filter=history&frequency=1mo

https://finance.yahoo.com/quote/AAPL/history?period1=1467311400&period2=1532802600&interval=1mo&filter=history&frequency=1mo

https://finance.yahoo.com/quote/TWTR/history?period1=1467311400&period2=1532802600&interval=1mo&filter=history&frequency=1mo

https://finance.yahoo.com/quote/FB/history?period1=1467311400&period2=1532802600&interval=1mo&filter=history&frequency=1mo

https://finance.yahoo.com/quote/MSFT/history?period1=1467311400&period2=1532802600&interval=1mo&filter=history&frequency=1mo

jeff jeffy answered 1 year ago

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