Question

Obtain monthly adjusted close prices of Microsoft (symbol: MSFT) and Exxon Mobil Corporation (symbol: XOM) during December 1989 – December 2019 from Yahoo Finance. Using Excel, compute monthly returns of each company during January 1990 – December 2019. Also, compute and report the arithmetic average and the standard deviation of each company’s returns. Compute and report the correlation coefficient between these two stock returns. Next, form a portfolio that combines Microsoft and Exxon Mobil Corporation with equal weight. Compute monthly returns on this newly formed portfolio. Also, compute and report the arithmetic average and the standard deviation of this portfolio’s returns. Is the portfolio standard deviation smaller than the weighted average of individual standard deviations? Also, compute and report the standard deviation of this portfolio’s returns using the equation that we learned in class. Were you able to obtain the same answer?

Guidelines:

1. Use the STDEV.P( : ) command to compute standard deviation.

2. Use the CORREL( : , : ) command to compute correlation coefficient.

Answer 1

1. Monthly returns :

Monthly returns are calculated as= Ending price -begin price / beign price

Formula =(B5-B4)/B4

=(C5-C4)/C4

2. Average return:

the average of the total monthly returns for the stock

=AVERAGE(D5:D364)

=AVERAGE(E5:E364)

3. Standard deviation of the stock is obtained for the following months

=STDEV.P(D5:D364)

=STDEV.P(E5:E364)

4. Correlation between the stocks is obtained by entering both the data sets

=CORREL(D5:D364,E5:E364)

5. Portfolio is constructed using both the stocks in equal weights

=(D5*0.5)+(E5*0.5)

6. Portfolio arithmetic avg return

=AVERAGE(F5:F364)

Std dev portfolio

=STDEV.P(F5:F364)

The final construction table is as follows

.

The Std dev and correlation is calculated as follows

Data table :

Thanks