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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% -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) Compute the weekly rate of return and the variance of an equally weighted portfolio formed from the three stocks

(ii) 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

Answer 1)

Expeceted return of portfolio = W1R1 + W2R2 + W3R3

Similarly Variance of portfolio = W12S12 +  W22S22 + W32 S32 + 2.W1s1*W2S2* r12 + 2.W1s1*W3S3* r13 +2.W2S2*W3S3 r23

Where , w1,2,3 = weight of share in stock = 1/3 =0.33

S = standard deviation , R = return and r = correlation

Week Date Apple Inc. (AAPL) McDonald's Corporation (MCD) Southwest Airlines Co. (LUV) S&P 500 Index (GSPC) Porfolio return
1 30-Oct-17
2 6-Nov-17 1.25% -1.82% -1.19% -0.21% -0.58%
3 13-Nov-17 -2.24% 0.68% 2.27% -0.13% 0.24%
4 20-Nov-17 2.83% 1.43% 0.79% 0.91% 1.67%
5 27-Nov-17 -2.24% 2.23% 8.67% 1.53% 2.86%
6 4-Dec-17 -0.98% 0.76% 5.70% 0.35% 1.80%
7 11-Dec-17 2.72% 0.53% 2.36% 0.92% 1.85%
8 18-Dec-17 0.60% -1.52% 1.97% 0.28% 0.34%
9 25-Dec-17 -3.30% 0.41% -0.79% -0.36% -1.21%
10 1-Jan-18 3.41% 1.12% -1.73% 2.60% 0.92%
11 8-Jan-18 1.19% -0.28% 1.62% 1.57% 0.84%
12 15-Jan-18 0.77% 1.47% -0.48% 0.86% 0.58%
13 22-Jan-18 -3.89% 1.27% -6.50% 2.23% -3.01%
14 29-Jan-18 -6.42% -5.03% -3.48% -3.85% -4.93%
15 5-Feb-18 -2.54% -5.07% -5.46% -5.16% -4.31%
16 12-Feb-18 10.69% -1.87% 5.00% 4.30% 4.56%
17 19-Feb-18 1.78% 3.34% -0.48% 0.55% 1.53%
18 26-Feb-18 0.40% -9.07% -0.31% -2.04% -2.96%
19 5-Mar-18 2.14% 6.72% 3.26% 3.54% 4.00%
20 12-Mar-18 -1.09% 3.26% 2.23% -1.24% 1.45%
21 19-Mar-18 -7.35% -4.55% -6.86% -5.95% -6.19%
22 26-Mar-18 1.72% 0.90% 0.99% 2.03% 1.19%
23 2-Apr-18 0.35% 3.11% -3.47% -1.38% 0.00%
24 9-Apr-18 3.77% 0.30% -0.40% 1.99% 1.21%
25 16-Apr-18 -5.16% -1.83% -0.54% 0.52% -2.49%
26 23-Apr-18 -2.05% -0.30% -2.26% -0.01% -1.52%
27 30-Apr-18 13.25% 4.25% -1.40% -0.24% 5.31%
28 7-May-18 2.59% 0.22% -0.61% 2.41% 0.73%
Avg retrun 0.45% 0.02% -0.04% 0.22% 0.14%
Standev 0.04463214 0.032558952 0.035295044 0.023867817 0.0278293
Variance 0.001992028 0.001060085 0.00124574 0.000569673 0.0007745
Correlation(APPL MCD) 0.358725793
Correlation(APPL LUV) 0.323015812
Correlation(LUV MCD) 0.327911528

Answer 2)

It is very clear that portfolio return is higher than two stock MCDand LUV , but less than APPL and Index.

Similarly , Variance (risk) is less than all three individual stocks .

So, the portfolio is with moderate return and moderate risk category , but not able to cross the INDEX.

Return graph

jeff jeffy answered 1 year ago
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