Question

In: Finance

Rob McGowan collects data from General Motors, General Electric, Oracle, and Microsoft. His professor seeks to...

Rob McGowan collects data from General Motors, General Electric, Oracle, and Microsoft. His professor seeks to form a portfolio using these stocks.

Provide a quick rundown of the issues that the professor face while creating his portfolio. Discuss what your goals and objective would be if you were creating this portfolio, how can you “add value”. Think about issues such as efficiency, risk-return, and how to add value. Include a recommendation of a portfolio make-up (weights, or even suggestions of other stocks).

Estimate and compare the monthly returns and variability (standard deviation) of each stock with that of the DJIA Index.

Which stock appears to be riskiest? Less risky?

How might the expected return of each stock relate to its riskiness?

Suppose the professor decides to make the portfolio with equal weight of stock holding (each stock holds 25% weight in the portfolio). Estimate the resulting portfolio position.

How does each stock affect the variability of the equity investment? What is the risk and return of the portfolio?

What is the correlation between the stocks? How do you think the stocks effect the portfolio’s risk and return?

How does this relate to your answer in question 1 above?

Compute the “beta” for each stock (Use DJIA as the market return).

What does beta measure?

How does this relate to your previous answers?

What is the required rate of return for each stock (CAPM)? Explain the number and put it into context? (Use the RF rate given in the second page)

Make a recommendation of what you would do if you were professor. Would you try something different?

What would be your main objective?

How would you weigh each stock in the portfolio? Why? What would be the resulting risk and return?

Month Sale date Risk-Free Rate GM GE Oracle Microsoft DJIA
1 1 June 1997 0.93% -0.869950 10.497540 21.134590 2.776860 4.485357
2 1 July 1997 1.05% 1.710171 9.648689 -0.918270 0.450306 5.939172
3 1 August 1997 1.14% 14.311720 5.415162 13.067660 12.584050 6.108390
4 1 September 1997 0.95% -2.627390 -9.505210 4.180328 -6.001140 -6.976050
5 1 October 1997 0.97% 10.834010 9.592326 -5.586150 1.270802 5.156892
6 1 November 1997 1.14% -1.208230 -0.700220 -0.333330 0.179265 -4.255630
7 1 December 1997 1.16% -8.006880 10.236920 -11.120400 7.217417 4.413641
8 1 January 1998 1.04% 6.896552 -0.811030 -30.009400 -10.125200 -1.308610
9 1 February 1998 1.09% -0.418240 8.503679 10.349460 19.839060 2.523061
10 1 March 1998 1.03% 17.140000 -2.521010 -2.070650 7.592975 5.459818
11 1 April 1998 0.95% -2.117120 12.891850 30.099500 8.473356 3.717582
12 1 May 1998 1.00% 1.760057 -0.416520 -18.546800 -0.840890 3.143211
13 1 June 1998 0.98% 3.741617 -2.506180 -10.798100 -6.561040 -2.456520
14 1 July 1998 0.96% -0.884650 10.028960 5.526316 30.618580 1.415543
15 1 August 1998 0.90% 3.833245 -0.658110 10.723190 -0.859390 -2.894680
16 1 September 1998 0.61% -17.046600 -7.609790 -22.860400 -6.639620 -10.917700
17 1 October 1998 0.96% -4.778510 -8.635700 31.386860 2.785460 -2.489960
18 1 November 1998 0.41% 20.299240 17.077050 10.888890 1.691332 14.066370
19 1 December 1998 0.39% 10.079820 4.292582 23.346690 22.377620 4.909059
20 1 January 1999 0.34% 2.512648 11.952580 16.815600 7.088803 0.524331
21 1 February 1999 0.44% 30.486980 1.411765 37.065370 24.704360 1.789155
22 1 March 1999 0.44% -10.975800 -1.233120 -7.102990 -12.258600 -0.223850
23 1 April 1999 0.29% 5.181951 10.582640 -29.492100 22.169500 5.444954
24 1 May 1999 0.50% 9.729500 -4.247310 0.929512 -13.820300 12.023180
25 1 June 1999 0.57% -8.763550 -2.897730 -2.148890 -1.727590 -3.798840
26 1 July 1999 0.55% -1.994620 8.718549 48.078430 16.165610 4.437037
27 1 August 1999 0.72% -8.502140 -2.125940 0.953390 -6.996380 -3.799420
28 1 September 1999 0.68% 7.967033 5.396384 -1.154250 8.925834 2.742073
29 1 October 1999 0.86% -4.355640 3.246239 20.116770 -2.597960 -6.078690
30 1 November 1999 1.07% 10.441770 11.298570 13.079980 2.667259 3.655407
31 1 December 1999 1.20% 5.367273 4.012059 38.100820 0.876813 3.285621
32 1 January 2000 1.32% 5.300939 11.460420 67.119410 25.077800 3.265296
33 1 February 2000 1.55% 14.230200 -8.341670 -8.567560 -11.685000 -2.786440
34 1 March 2000 1.69% -12.903200 -3.397310 32.407410 -11.783600 -8.179750
35 1 April 2000 1.66% 16.444440 20.826670 7.524476 0.077084 10.692530
36 1 May 2000 1.79% 9.291357 1.323001 3.655047 -19.190100 -3.654810
37 1 June 2000 1.69% -24.684400 -1.393070 -2.271300 -12.091500 -1.475980

Solutions

Expert Solution

Month Sale date Risk-Free Rate GM GE Oracle Microsoft DJIA
1 1-Jun-97 0.93% -0.86995 10.49754 21.13459 2.77686 4.485357
2 1-Jul-97 1.05% 1.710171 9.648689 -0.91827 0.450306 5.939172
3 1-Aug-97 1.14% 14.31172 5.415162 13.06766 12.58405 6.10839
4 1-Sep-97 0.95% -2.62739 -9.50521 4.180328 -6.00114 -6.97605
5 1-Oct-97 0.97% 10.83401 9.592326 -5.58615 1.270802 5.156892
6 1-Nov-97 1.14% -1.20823 -0.70022 -0.33333 0.179265 -4.25563
7 1-Dec-97 1.16% -8.00688 10.23692 -11.1204 7.217417 4.413641
8 1-Jan-98 1.04% 6.896552 -0.81103 -30.0094 -10.1252 -1.30861
9 1-Feb-98 1.09% -0.41824 8.503679 10.34946 19.83906 2.523061
10 1-Mar-98 1.03% 17.14 -2.52101 -2.07065 7.592975 5.459818
11 1-Apr-98 0.95% -2.11712 12.89185 30.0995 8.473356 3.717582
12 1-May-98 1.00% 1.760057 -0.41652 -18.5468 -0.84089 3.143211
13 1-Jun-98 0.98% 3.741617 -2.50618 -10.7981 -6.56104 -2.45652
14 1-Jul-98 0.96% -0.88465 10.02896 5.526316 30.61858 1.415543
15 1-Aug-98 0.90% 3.833245 -0.65811 10.72319 -0.85939 -2.89468
16 1-Sep-98 0.61% -17.0466 -7.60979 -22.8604 -6.63962 -10.9177
17 1-Oct-98 0.96% -4.77851 -8.6357 31.38686 2.78546 -2.48996
18 1-Nov-98 0.41% 20.29924 17.07705 10.88889 1.691332 14.06637
19 1-Dec-98 0.39% 10.07982 4.292582 23.34669 22.37762 4.909059
20 1-Jan-99 0.34% 2.512648 11.95258 16.8156 7.088803 0.524331
21 1-Feb-99 0.44% 30.48698 1.411765 37.06537 24.70436 1.789155
22 1-Mar-99 0.44% -10.9758 -1.23312 -7.10299 -12.2586 -0.22385
23 1-Apr-99 0.29% 5.181951 10.58264 -29.4921 22.1695 5.444954
24 1-May-99 0.50% 9.7295 -4.24731 0.929512 -13.8203 12.02318
25 1-Jun-99 0.57% -8.76355 -2.89773 -2.14889 -1.72759 -3.79884
26 1-Jul-99 0.55% -1.99462 8.718549 48.07843 16.16561 4.437037
27 1-Aug-99 0.72% -8.50214 -2.12594 0.95339 -6.99638 -3.79942
28 1-Sep-99 0.68% 7.967033 5.396384 -1.15425 8.925834 2.742073
29 1-Oct-99 0.86% -4.35564 3.246239 20.11677 -2.59796 -6.07869
30 1-Nov-99 1.07% 10.44177 11.29857 13.07998 2.667259 3.655407
31 1-Dec-99 1.20% 5.367273 4.012059 38.10082 0.876813 3.285621
32 1-Jan-00 1.32% 5.300939 11.46042 67.11941 25.0778 3.265296
33 1-Feb-00 1.55% 14.2302 -8.34167 -8.56756 -11.685 -2.78644
34 1-Mar-00 1.69% -12.9032 -3.39731 32.40741 -11.7836 -8.17975
35 1-Apr-00 1.66% 16.44444 20.82667 7.524476 0.077084 10.69253
36 1-May-00 1.79% 9.291357 1.323001 3.655047 -19.1901 -3.65481
37 1-Jun-00 1.69% -24.6844 -1.39307 -2.2713 -12.0915 -1.47598
Average return 0.01 2.63 3.55 7.93 2.77 1.29
Standard Dev 10.88035 7.541939 20.93922 12.30977 5.474731
Beta 1.11 0.91 0.43 0.81 1
CAPM 1.43 1.18 0.56 1.05

Q. Which stock appears to be riskiest? Less risky?

A. Oracle and GE

Q.How might the expected return of each stock relate to its riskiness?

A. It clear proof that, stock return risk as Oracle have maximum return as well as risk.

Q.Suppose the professor decides to make the portfolio with equal weight of stock holding (each stock holds 25% weight in the portfolio.

E(R) =w1r1 +w2r12 +w2r2 +....

E(R) = 0.25( 2.63+3.55+7.99+2.77) = 4.222

Q.What is the correlation between the stocks? How do you think the stocks effect the portfolio’s risk and return?

GM GE Oracle Microsoft DJIA
GM 1
GE 0.31007 1
Oracle 0.128724 0.25266 1
Microsoft 0.311336 0.509806 0.395194 1
DJIA 0.57363 0.676836 0.11505 0.369427 1

The correlation indicate movement direction as well as relative quantity of the stockreturn and risk . Stock with different correlation factors impact the return and risk as diversification strategy.

Q.Compute the “beta” for each stock

SEE the table , calculated

Q. What is the required rate of return for each stock (CAPM)

SEE the table , calculated , Return = Risk free + Beta ( market return- Risk free)

Q Make a recommendation of what you would do if you were professor. Would you try something different?

A. my recommendation would be based out on the need of investors , like for higher return the maximum investment should be done in oracle , while to minimize risk the maximum investment should be done in GE

Q. What would be your main objective?

A. Maximize return with moderate risk

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

Rob McGowan collects data from General Motors, General Electric, Oracle, and Microsoft. His professor seeks to...
Rob McGowan collects data from General Motors, General Electric, Oracle, and Microsoft. His professor seeks to form a portfolio using these stocks. ? 3. Compute the “beta” for each stock (Use DJIA as the market return). a) What does beta measure? 1997-06-01 4.93 1997-07-01 5.05 1997-08-01 5.14 1997-09-01 4.95 1997-10-01 4.97 1997-11-01 5.14 1997-12-01 5.16 1998-01-01 5.04 1998-02-01 5.09 1998-03-01 5.03 1998-04-01 4.95 1998-05-01 5.00 1998-06-01 4.98 1998-07-01 4.96 1998-08-01 4.90 1998-09-01 4.61 1998-10-01 3.96 1998-11-01 4.41 1998-12-01 4.39 1999-01-01...
At the beginning of the month, you owned $1,921 of General Electric, $2,275 of Microsoft, and...
At the beginning of the month, you owned $1,921 of General Electric, $2,275 of Microsoft, and $2,061 of Netflix. The monthly returns for General Electric, Microsoft, and Netflix were 4.0 percent, 6.0 percent, and -5.0 percent. What is your portfolio return?  ROUND YOUR ANSWER TO TWO DECIMAL PLACES.
1. Rob took the afternoon off from his job as a tire salesman to mow his...
1. Rob took the afternoon off from his job as a tire salesman to mow his lawn. Rob told his wife that this made sense because he would be saving the $50 he would have to pay a lawn service, noting that this would be the opportunity cost to the family. Rob’s wife disagreed. What did Rob’s wife say?    a.   That Rob just wanted to take the afternoon off.    b.   The opportunity cost would be Rob’s lost income...
A substantial number of organizations, including Adobe Systems, the Gap, Microsoft, General Electric, and IBM, have...
A substantial number of organizations, including Adobe Systems, the Gap, Microsoft, General Electric, and IBM, have abolished their performance reviews in favor of continuous feedback and coaching. What advantages do continuous feedback and coaching offer over performance reviews?
A radio executive considering a switch in his radio format collects the following data on the...
A radio executive considering a switch in his radio format collects the following data on the radio preferences of listeners in various age groups. Radio preference Age Young adult Middle Age Older adult Music 14 10 3 News/talk 4 15 11 Sports 7 9 5 Test the null hypothesis that radio preference does not vary by age. Use a .05 confidence level for your test and report (a) the critical value of the test statistic, (b) the obtained value of...
In Yahoo Finance, find weekly price data for six companies, Google (GOOGL), Ford Motors, Goldman Sachs, Starbucks, General Electric, and Macy’s Inc.
In Yahoo Finance, find weekly price data for six companies, Google (GOOGL), Ford Motors, Goldman Sachs, Starbucks, General Electric, and Macy’s Inc. from 01/01/2019 to 12/31/2019. Use these data to calculate the variance-covariance matrix of the weekly returns and correlation coefficient matrix of the weekly returns.
Please download historical monthly price data for General Electric (GE) from Yahoo Finance for the period...
Please download historical monthly price data for General Electric (GE) from Yahoo Finance for the period of 01/December/2007 – 01/December/2018. (a) Please calculate the monthly return. (b) Please calculate the annual stock returns. (c) An analyst expects the return for GE stock to be 10% lower than the historical average while its volatility to be 20% higher. Assume that the probability distribution of the returns of GE stock for 2019 is normal with the expected value and standard deviation as...
Rob is 84 years old, and his wife of 60 years recently died from a long-term...
Rob is 84 years old, and his wife of 60 years recently died from a long-term illness. Rob has been experiencing some health concerns and is finding managing on his own difficult. Donna is meeting with Rob to plan for the provision of home and community care services. Donna notes that Rob is articulate and neatly dressed. His home is a little dusty, but well organised. Rob is a little thin and admits that he is not a very good...
This question is being asked from chapter 5 of the book electric motors and control systems...
This question is being asked from chapter 5 of the book electric motors and control systems 2nd version and the files attached. file:///C:/Users/prime/Downloads/ET55a%20Single%20Phase%20AC%20Motors%20%236B.pdf file:///C:/Users/prime/Downloads/ET55a%20Three%20Phase%20AC%20Motors%20%236A.pdf 1. What are the differences (in construction, starting torque, and operation) between “capacitor start” and “capacitor start/capacitor run” motors?
This question is being asked from chapter 5 of the book electric motors and control systems...
This question is being asked from chapter 5 of the book electric motors and control systems 2nd version and the files attached. file:///C:/Users/prime/Downloads/ET55a%20Single%20Phase%20AC%20Motors%20%236B.pdf file:///C:/Users/prime/Downloads/ET55a%20Three%20Phase%20AC%20Motors%20%236A.pdf 1. Why does an induction motor (with a squirrel cage rotor) need “slip” - operating at less than the synchronous speed (the speed in which the magnetic field rotates in the stator)?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT