## Description

**Solution Pages:** 5

**Files that you will download:**

Word (.docx) & Excel (.xlsx)

### Questions Covered in the Solution

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

** Assignment:** 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 a0s 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?

### Sample of Solution

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

**(a).** As per the calculations, it can be realized that the riskiest stock among the portfolio of four stocks is ‘*Oracle’* with the standard deviation of 15.45% among the monthly returns. Whereas, the least risky stock is ‘*General Electric (GE)’ *with the standard deviation of 2.067%.

**(b).** Since the standard deviation explains the variations of stock’s return from its mean value, it precisely defines the risk associated with the stock’s return by quantifying the uncertainty. While, the return is directly related to risk considered, which escalates the fact that *‘High-Risk High Return’*. So, if an investor considers a risky stock, he/she would expect a correspondent higher return to compensate for their assumed risk.

……..

**Compute the “beta” for each stock (Use DJIA a0s the market returns).**

**a. **Beta is essentially a measure of systemic risk which can’t be diversified and which eventually determines investor’s expectations of return from a particular stock. The beta for a market is 1 whereas for the different companies it can be both negative and positive, which depicts relation of that particular stocks’ return with that of market’s.

…….

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

**a. **So being in the professor’s position, my main objective would be to maximize return for the minimum possible risk. Risk and return goes side by side, if we just try to maximize return, we would end up with risk beyond limits. Whereas, if we tried to keep the risk minimal, our return would touch the least values. Effectively, among this tussle of tradeoff, I would try to find the point which would get me maximum return for most reasonable level of risk.

…….

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