Question
In: Finance
Week Date Apple Inc. (AAPL) McDonald's Corporation (MCD) Southwest Airlines Co. (LUV) S&P 500 Index (GSPC)...
| Week | Date | Apple Inc. (AAPL) | McDonald's Corporation (MCD) | Southwest Airlines Co. (LUV) | S&P 500 Index (GSPC) |
| 1 | 30-Oct-17 | ||||
| 2 | 6-Nov-17 | 1.2549% | -1.8187% | -1.1872% | -0.2141% |
| 3 | 13-Nov-17 | -2.2355% | 0.6847% | 2.2714% | -0.1336% |
| 4 | 20-Nov-17 | 2.8316% | 1.4330% | 0.7893% | 0.9140% |
| 5 | 27-Nov-17 | -2.2409% | 2.2269% | 8.6687% | 1.5293% |
| 6 | 4-Dec-17 | -0.9841% | 0.7554% | 5.6980% | 0.3512% |
| 7 | 11-Dec-17 | 2.7198% | 0.5289% | 2.3625% | 0.9168% |
| 8 | 18-Dec-17 | 0.5968% | -1.5205% | 1.9672% | 0.2814% |
| 9 | 25-Dec-17 | -3.3001% | 0.4109% | -0.7899% | -0.3626% |
| 10 | 1-Jan-18 | 3.4068% | 1.1225% | -1.7302% | 2.6010% |
| 11 | 8-Jan-18 | 1.1923% | -0.2775% | 1.6204% | 1.5708% |
| 12 | 15-Jan-18 | 0.7741% | 1.4668% | -0.4753% | 0.8635% |
| 13 | 22-Jan-18 | -3.8916% | 1.2742% | -6.5013% | 2.2265% |
| 14 | 29-Jan-18 | -6.4234% | -5.0327% | -3.4767% | -3.8547% |
| 15 | 5-Feb-18 | -2.5435% | -5.0677% | -5.4626% | -5.1620% |
| 16 | 12-Feb-18 | 10.6908% | -1.8712% | 5.0018% | 4.3011% |
| 17 | 19-Feb-18 | 1.7815% | 3.3355% | -0.4815% | 0.5519% |
| 18 | 26-Feb-18 | 0.4004% | -9.0662% | -0.3110% | -2.0402% |
| 19 | 5-Mar-18 | 2.1421% | 6.7192% | 3.2588% | 3.5418% |
| 20 | 12-Mar-18 | -1.0876% | 3.2562% | 2.2327% | -1.2402% |
| 21 | 19-Mar-18 | -7.3475% | -4.5455% | -6.8637% | -5.9502% |
| 22 | 26-Mar-18 | 1.7224% | 0.9033% | 0.9873% | 2.0326% |
| 23 | 2-Apr-18 | 0.3530% | 3.1142% | -3.4742% | -1.3783% |
| 24 | 9-Apr-18 | 3.7739% | 0.2977% | -0.3979% | 1.9900% |
| 25 | 16-Apr-18 | -5.1591% | -1.8302% | -0.5448% | 0.5210% |
| 26 | 23-Apr-18 | -2.0475% | -0.2960% | -2.2640% | -0.0086% |
| 27 | 30-Apr-18 | 13.2468% | 4.2514% | -1.4011% | -0.2431% |
| 28 | 7-May-18 | 2.5939% | 0.2181% | -0.6063% | 2.4142% |
(i) Generate a covariance and correlation matrix of these stocks. Interprete your results.
(ii) Compute the weekly rate of return and the variance of an equally weighted portfolio formed from the three stocks
(iii) Examine and compare the pattern of the returns of your portfolio with those of the individual stocks, and the stock index. Compare the corresponding variances. Comment on your observations
Solutions
Expert Solution
Ans 1) Covariance Matrix
Covariance matrix
| Apple Inc. (AAPL) | McDonald's Corporation(MCD) | Southwest Airlines Co. (LUV) | S&P 500 Index (GSPC) | |
| Apple Inc. (AAPL) | 1 | 0.000521292 | 0.000508845 | 0.0005781 |
| McDonald'sCorporation(MCD) | 0.00052129 | 1 | 0.000376826 | 0.00043445 |
| Southwest Airlines Co. (LUV) | 0.00050884 | 0.000376826 | 1 | 0.000461747 |
| S&P 500 Index (GSPC) | 0.0005781 | 0.00043445 | 0.000461747 | 1 |
Correlation matrix
| Apple Inc. (AAPL) | McDonald's Corporation(MCD) | Southwest Airlines Co. (LUV) | S&P 500 Index (GSPC) | |
| Apple Inc. (AAPL) | 1 | 0.358725793 | 0.323015812 | 0.542678636 |
| McDonald's Corporation(MCD) | 0.35872579 | 1 | 0.327911528 | 0.559057845 |
| Southwest Airlines Co. (LUV) | 0.32301581 | 0.327911528 | 1 | 0.548121937 |
| S&P 500 Index (GSPC) | 0.54267864 | 0.559057845 | 0.548121937 | 1 |
While looking at correlation matrix one can say that there is moderate positive correlation between stock and index and there is positive but less correlation between each stocks.
Ans 2) I find weekly rate of return using geometric mean which is given as follows:
| Weekly average return of the portfolio | 1+r | geometric mean return | Variance |
| -0.58% | 99.42% | 0.107% | 0.14% |
| 0.24% | 100.24% | ||
| 1.68% | 101.68% | ||
| 2.88% | 102.88% | ||
| 1.82% | 101.82% | ||
| 1.87% | 101.87% | ||
| 0.35% | 100.35% | ||
| -1.23% | 98.77% | ||
| 0.93% | 100.93% | ||
| 0.85% | 100.85% | ||
| 0.59% | 100.59% | ||
| -3.04% | 96.96% | ||
| -4.98% | 95.02% | ||
| -4.36% | 95.64% | ||
| 4.61% | 104.61% | ||
| 1.55% | 101.55% | ||
| -2.99% | 97.01% | ||
| 4.04% | 104.04% | ||
| 1.47% | 101.47% | ||
| -6.25% | 93.75% | ||
| 1.20% | 101.20% | ||
| 0.00% | 100.00% | ||
| 1.22% | 101.22% | ||
| -2.51% | 97.49% | ||
| -1.54% | 98.46% | ||
| 5.37% | 105.37% | ||
| 0.74% | 100.74% |
weekly rate of return of the portfolio is .107% and variance is .14%.
Ans 3)
| Week | Apple Inc. (AAPL) | McDonald's Corporation(MCD) | Southwest Airlines Co. (LUV) | S&P 500 Index (GSPC) |
| 1 | ||||
| 2 | 101.25% | 98.18% | 98.81% | 99.79% |
| 3 | 97.76% | 100.68% | 102.27% | 99.87% |
| 4 | 102.83% | 101.43% | 100.79% | 100.91% |
| 5 | 97.76% | 102.23% | 108.67% | 101.53% |
| 6 | 99.02% | 100.76% | 105.70% | 100.35% |
| 7 | 102.72% | 100.53% | 102.36% | 100.92% |
| 8 | 100.60% | 98.48% | 101.97% | 100.28% |
| 9 | 96.70% | 100.41% | 99.21% | 99.64% |
| 10 | 103.41% | 101.12% | 98.27% | 102.60% |
| 11 | 101.19% | 99.72% | 101.62% | 101.57% |
| 12 | 100.77% | 101.47% | 99.52% | 100.86% |
| 13 | 96.11% | 101.27% | 93.50% | 102.23% |
| 14 | 93.58% | 94.97% | 96.52% | 96.15% |
| 15 | 97.46% | 94.93% | 94.54% | 94.84% |
| 16 | 110.69% | 98.13% | 105.00% | 104.30% |
| 17 | 101.78% | 103.34% | 99.52% | 100.55% |
| 18 | 100.40% | 90.93% | 99.69% | 97.96% |
| 19 | 102.14% | 106.72% | 103.26% | 103.54% |
| 20 | 98.91% | 103.26% | 102.23% | 98.76% |
| 21 | 92.65% | 95.45% | 93.14% | 94.05% |
| 22 | 101.72% | 100.90% | 100.99% | 102.03% |
| 23 | 100.35% | 103.11% | 96.53% | 98.62% |
| 24 | 103.77% | 100.30% | 99.60% | 101.99% |
| 25 | 94.84% | 98.17% | 99.46% | 100.52% |
| 26 | 97.95% | 99.70% | 97.74% | 99.99% |
| 27 | 113.25% | 104.25% | 98.60% | 99.76% |
| 28 | 102.59% | 100.22% | 99.39% | 102.41% |
| geometric mean | 0.36% | -0.03% | -0.10% | 0.20% |
| Variance | 0.19% | 0.10% | 0.12% | 0.05% |
variance of portfolio is .14% which is greater than two stocks and index but less than Apple.
Similarly at the same time return is greater than two stocks but less than Apple and S&P 500 index. S&P 500 has best risk adjusted return and it is better than even our portfolio. So our portfolio is underperformed in comparision to S&P 500 index.
jeff jeffy answered 2 years agoRelated Solutions
Appendix 1.1: Table 1.1 - Weekly discrete rate of returns Week Date Apple Inc. (AAPL) McDonald's...
Appendix 1.1:
Table 1.1 - Weekly discrete rate of returns
Week
Date
Apple Inc. (AAPL)
McDonald's Corporation (MCD)
Southwest Airlines Co. (LUV)
S&P 500 Index (GSPC)
1
30-Oct-17
2
6-Nov-17
1.2549%
-1.8187%
-1.1872%
-0.2141%
3
13-Nov-17
-2.2355%
0.6847%
2.2714%
-0.1336%
4
20-Nov-17
2.8316%
1.4330%
0.7893%
0.9140%
5
27-Nov-17
-2.2409%
2.2269%
8.6687%
1.5293%
6
4-Dec-17
-0.9841%
0.7554%
5.6980%
0.3512%
7
11-Dec-17
2.7198%
0.5289%
2.3625%
0.9168%
8
18-Dec-17
0.5968%
-1.5205%
1.9672%
0.2814%
9
25-Dec-17
-3.3001%
0.4109%
-0.7899%
-0.3626%
10
1-Jan-18
3.4068%
1.1225%...
Appendix 1.1: Table 1.1 - Weekly discrete rate of returns Week Date Apple Inc. (AAPL) McDonald's...
Appendix 1.1:
Table 1.1 - Weekly discrete rate of returns
Week
Date
Apple Inc. (AAPL)
McDonald's Corporation (MCD)
Southwest Airlines Co. (LUV)
S&P 500 Index (GSPC)
1
30-Oct-17
2
6-Nov-17
1.2549%
-1.8187%
-1.1872%
-0.2141%
3
13-Nov-17
-2.2355%
0.6847%
2.2714%
-0.1336%
4
20-Nov-17
2.8316%
1.4330%
0.7893%
0.9140%
5
27-Nov-17
-2.2409%
2.2269%
8.6687%
1.5293%
6
4-Dec-17
-0.9841%
0.7554%
5.6980%
0.3512%
7
11-Dec-17
2.7198%
0.5289%
2.3625%
0.9168%
8
18-Dec-17
0.5968%
-1.5205%
1.9672%
0.2814%
9
25-Dec-17
-3.3001%
0.4109%
-0.7899%
-0.3626%
10
1-Jan-18
3.4068%
1.1225%...
Appendix 1.1: Table 1.1 - Weekly discrete rate of returns Week Date Apple Inc. (AAPL) McDonald's...
Appendix 1.1:
Table 1.1 - Weekly discrete rate of returns
Week
Date
Apple Inc. (AAPL)
McDonald's Corporation (MCD)
Southwest Airlines Co. (LUV)
S&P 500 Index (GSPC)
1
30-Oct-17
2
6-Nov-17
1.2549%
-1.8187%
-1.1872%
-0.2141%
3
13-Nov-17
-2.2355%
0.6847%
2.2714%
-0.1336%
4
20-Nov-17
2.8316%
1.4330%
0.7893%
0.9140%
5
27-Nov-17
-2.2409%
2.2269%
8.6687%
1.5293%
6
4-Dec-17
-0.9841%
0.7554%
5.6980%
0.3512%
7
11-Dec-17
2.7198%
0.5289%
2.3625%
0.9168%
8
18-Dec-17
0.5968%
-1.5205%
1.9672%
0.2814%
9
25-Dec-17
-3.3001%
0.4109%
-0.7899%
-0.3626%
10
1-Jan-18
3.4068%
1.1225%...
Appendix 1.1: Table 1.1 - Weekly discrete rate of returns Week Date Apple Inc. (AAPL) McDonald's...
Appendix 1.1:
Table 1.1 - Weekly discrete rate of returns
Week
Date
Apple Inc. (AAPL)
McDonald's Corporation (MCD)
Southwest Airlines Co. (LUV)
S&P 500 Index (GSPC)
1
30-Oct-17
2
6-Nov-17
1.2549%
-1.8187%
-1.1872%
-0.2141%
3
13-Nov-17
-2.2355%
0.6847%
2.2714%
-0.1336%
4
20-Nov-17
2.8316%
1.4330%
0.7893%
0.9140%
5
27-Nov-17
-2.2409%
2.2269%
8.6687%
1.5293%
6
4-Dec-17
-0.9841%
0.7554%
5.6980%
0.3512%
7
11-Dec-17
2.7198%
0.5289%
2.3625%
0.9168%
8
18-Dec-17
0.5968%
-1.5205%
1.9672%
0.2814%
9
25-Dec-17
-3.3001%
0.4109%
-0.7899%
-0.3626%
10
1-Jan-18
3.4068%
1.1225%...
The following historic data are available for the S&P 500 and AAPL:
The following historic data are available for the
S&P 500 and AAPL: 30
year Arithmetic Average Return for S&P 500 =10% 30
year Arithmetic Average Return for AAPL = 12% 30
year Arithmetic Average Return on treasury bonds = 5%On an ex post basis, what is the Risk Premium on the
Market?On an ex post basis, what is the Risk Premium for AAPL?On an ex post basis, what is the Risk Premium for treasury
bonds?
The S&P 500, or simply the S&P, is a stock market index that measures the stock...
The S&P 500, or simply the S&P, is a stock market index
that measures the stock performance of 500 large companies listed
on stock exchanges in the United States.
define an adequate investment strategy, and select the assets
they would invest to start with.
-the potential customer profile specifications (SAP 500),
-the portfolio objectives
-the investment policies (strategic allocation)
-The choice and justification of a benchmark
-a trial portfolio based on the team investment guidelines
-a brief evaluation on each...
Consider a three month futures contract on the S&P 500 index. The value of the index...
Consider a three month futures contract on the S&P 500
index. The value of the index is 1000; the dividend yield is 1% and
the three month interest rate is 4% continuously compounded. (a)
Explain how to compute the futures price making sure to define all
terms and assumptions. In particular carefully explain why the
formula holds. Then compute the fair futures price. (b) Suppose the
actual futures price is 1010.0. In great detail describe a strategy
that creates guaranteed...
The S&P 500 index current level is 3,000. The dividend yield on the index is equal...
The S&P 500 index current level is 3,000. The dividend yield
on the index is equal to the risk- free rate of interest. Given
volatility of the index of 25%:
a) Compute the probability that the index value in 6 months is
greater than 3,300.
b) Compute the probability that the index value in 6 months is less
than 2700.
c) Compute the probability that the index value in 6 months is
between 2700 and 3300
The S&P 500 index current level is 3,000. The dividend yield on the index is equal...
The S&P 500 index current level is 3,000. The dividend yield
on the index is equal to the riskfree
rate of interest. Given a volatility of the index of 25%:
a) Compute the probability that the index value in 6 months is
greater than 3,300.
b) Compute the probability that the index value in 6 months is
less than 2700.
c) Compute the probability that the index value in 6 months is
between 2700 and 3300.
Suppose you invest $15,000 in an S&P 500 Index fund (S&P fund) and $10,000 in a...
Suppose you invest $15,000 in an S&P 500 Index fund (S&P
fund) and $10,000 in a total bond market fund (Bond fund). The
expected returns of the S&P and Bond funds are 8% and 4%,
respectively. The standard deviations of the S&P and Bond funds
are 18% and 7% respectively. The correlation between the two funds
is 0.40. The risk-free rate is 2%. What is the expected return on
your portfolio? What is the standard deviation on your portfolio?
What...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Search the Internet to find (at least 2 websites) related to the general field of malware....
- Consider the following schema: Suppliers(sid, sname, address) Parts(pid, pname, color) Catalog(sid, pid, cost) write the following...
- Singh Development Co. is deciding whether to proceed with Project X. The cost would be $12...
- CS2123 Data Structures - Fall 2019 Assignment 1: Function Runtimes Table Due 9/11/19 by 11:59pm Completing...
- Question 2. Design a 16-1 MUX using any number of lower MUXs, such as 8-1 or...
- . Write a function that takes, as arguments, two objects, value1 and value2. If
- Wii Brothers, a game manufacturer, has a new idea for an adventure game. It can market...
ADVERTISEMENT