Choose five securities among different asset classes (domestic stocks and bonds, foreign stocks and bonds, mutual funds, commodities (futures), ETFs) and perform the following:

  1. Obtain 5 years monthly price data for each security;
  2. Calculate average return and standard deviation of the return for each security;
  3. Calculate variance-covariance and correlation matrices;
  4. Calculate the return and standard deviation of the portfolios comprising:
  5. all of the securities with equal weights
  6. the highest and lowest return securities with the following weights (1;0), (0.9;0.1), (0.8;0.2), etc.
  7. securities with the lowest correlation coefficient using following weights (1;0), (0.9;0.1), (0.8;0.2), etc.
  8. securities with the highest correlation coefficient using following weights (1;0), (0.9;0.1), (0.8;0.2), etc

as well as analyze and compare risk and return of all of the above portfolios. Plot each of the above portfolios on risk-return space. Identify the portfolio which provides the best diversification benefits.

5. Assuming the current risk free rate equal to a yield on a three-month treasuries, determine the weights of securities in an optimal portfolio (use Excel template)

). Calculate the return and standard deviation of the market portfolio. Plot the original securities, the risk-free rate and the market portfolio on the risk-return space and show the capital market line.

6. Using the market portfolio obtained in question 5 Calculate the betas of all five securities, plot them on a risk-return space, show the security market line and determine which of the securities are undervalued and overvalued. Assume the current risk free rate equal to a yield on a three-month treasuries.

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