DEPARTMENT OF MANAGEMENT SCIENCES
MASTER IN BUSINESS ADMINISTRATION
PROJECT REPORT: ANALYZING PORTFOLIOS
SUBMITTED BY: Muhammad Asim (005), Hassan Javed (022), Zeeshan Javed (023)
SUBMITTED TO: Sir Farhan Shahzad
SUBJECT: Introduction to Business Finance MGT-531
SEMESTER: 1ST
DATE: 05/02/2024 (Monday)
Table of Contents
1. Standard deviation and return for susie’s entire portfolio ...... 2
2. Diversifying Portfolio ............................................................ 5
3. Portfolio's after adding Lyxor USDJIA ................................. 6
4. Calculation of Betas ............................................................... 8
5. Calculation of Required rate of returns ................................ 10
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1. Standard deviation and return for susie’s entire portfolio
Using the annual return data provided in Exhibit 1 of the case for Lyxor ChinaH and Lyxor
MSIndia, calculate their mean returns, standard deviations, covariance and correlation. With
these numbers, compute the standard deviation and return for Susie’s entire portfolio.
Mean:
𝑆𝑢𝑚
𝑥̅ =
𝑁𝑢𝑚𝑏𝑒𝑟
Variance:
∑(𝑥𝑖 − 𝑥̅ )^2
𝑛−1
Standard Deviation:
𝑆𝐷 = √𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒
Year Lyxor ChinaH Square of Deviation From the Mean
𝑹𝒊 (𝑹𝒊 − 𝐑̅ )𝟐
2009 2.00% 0.000503682
2010 4.25% 0.00201986
2011 -29.40% 0.085005568
2012 13.23% 0.018155638
2013 8.86% 0.008288802
2014 2.31% 0.000652438
2015 -2.96% 0.00073751
Mean (R̅) -0.24%
Variance 0.01922725
Standard Deviation 13.866%
Year Lyxor MSIndia Square of Deviation
From the Mean
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𝑹𝒊 ̅ )𝟐
(𝑹𝒊 − 𝐑
2009 5.86% 0.000941613
2010 22.40% 0.038449607
2011 -27.07% 0.089170492
2012 0.60% 0.000480236
2013 -6.84% 0.009276442
2014 33.87% 0.09658776
2015 -9.28% 0.014571939
Mean (R̅) 2.79%
Variance 0.041579681
Standard Deviation 20.391%
Year Lyxor ChinaH Lyxor Product of Deviation
MSIndia From the Mean
𝒙𝒊 𝒚𝒊 (𝒙𝒊 − 𝐱̅)(𝒚𝒊 − 𝐲̅)
2009 2.00% 5.86% 0.000688675
2010 4.25% 22.40% 0.008812652
2011 -29.40% -27.07% 0.087063128
2012 13.23% 0.60% -0.002952793
2013 8.86% -6.84% -0.008768728
2014 2.31% 33.87% 0.007938355
2015 -2.96% -9.28% 0.003278255
Mean -0.24% 2.79%
Covariance 0.01601
Correlation 0.56623
Existing Portfolio: 60% in Lyxor ChinaH and 40% in Lyxor MSIndia
𝒛𝒊 = 𝟎. 𝟔 ∗ 𝒙𝒊 + 𝟎. 𝟒 ∗ 𝒚𝒊
Year Lyxor Lyxor Existing Square of Deviation
ChinaH MSIndia Portfolio From the Mean
𝒙𝒊 𝒚𝒊 𝒛𝒊 (𝒛𝒊 − 𝐳̅̅)^𝟐
2009 2.00% 5.86% 3.54% 0.000662548
2010 4.25% 22.40% 11.51% 0.011109160
2011 -29.40% -27.07% -28.47% 0.086659584
2012 13.23% 0.60% 8.18% 0.005195526
2013 8.86% -6.84% 2.58% 0.000259210
2014 2.31% 33.87% 14.93% 0.019499330
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2015 -2.96% -9.28% -5.49% 0.004170576
Mean -0.24% 2.79% 0.97%
Portfolio Variance 0.021259322
Portfolio Standard Deviation 14.581%
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2. Diversifying Portfolio
40% in Lyxor ChinaH, 30% in Lyxor MSIndia and 30% in Lyxor USDJIA
𝒂𝒊 = 𝟎. 𝟒 ∗ 𝒙𝒊 + 𝟎. 𝟑 ∗ 𝒚𝒊 + 𝟎. 𝟑 ∗ 𝐳̅𝐢
After adding Lyxor USDJIA, what was the portfolio's standard deviation and return? How does
the new portfolio compare with the calculation in part 1?
Year Lyxor Lyxor Lyxor New Square of
ChinaH MSIndia USDJIA Portfolio Deviation
From the Mean
𝒙𝒊 𝒚𝒊 𝒛𝒊 𝒂𝒊 (𝒂𝒊 − 𝐳̅̅)^𝟐
2009 2.00% 5.86% 5.56% 4.23% 0.000052252
2010 4.25% 22.40% 6.11% 10.25% 0.004554135
2011 -29.40% -27.07% 7.94% -17.50% 0.044113412
2012 13.23% 0.60% 18.29% 10.96% 0.005559174
2013 8.86% -6.84% 17.09% 6.62% 0.000971606
2014 2.31% 33.87% 14.20% 15.35% 0.014023235
2015 -2.96% -9.28% -4.71% -5.38% 0.007890974
Mean -0.24% 2.79% 9.21% 3.503%
Portfolio Variance 0.012860798
Portfolio Standard Deviation 11.341%
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3. Portfolio's after adding Lyxor USDJIA
Based on your data analysis, should Susie diversify her portfolio or remain invested in China and
India only?
Year Lyxor USDJIA Square of Deviation From the Mean
𝑹𝒊 (𝑹𝒊 − 𝐑̅ )𝟐
2009 5.56% 0.001333299
2010 6.11% 0.000964832
2011 7.94% 0.000162545
2012 18.29% 0.008242831
2013 17.09% 0.006213506
2014 14.20% 0.002488973
2015 -4.71% 0.019371082
Mean (R̅) 9.21%
Variance 0.006462845
Standard Deviation 8.039%
Year Lyxor Lyxor Product of Deviation From the
ChinaH USDJIA Mean
𝒙𝒊 𝒚𝒊 (𝒙𝒊 − 𝐱̅)(𝒚𝒊 − 𝐲̅)
2009 2.00% 5.56% -0.000819487
2010 4.25% 6.11% -0.001396003
2011 -29.40% 7.94% 0.003717148
2012 13.23% 18.29% 0.012233309
2013 8.86% 17.09% 0.007176526
2014 2.31% 14.20% 0.001274323
2015 -2.96% -4.71% 0.003779732
Mean -0.24% 9.21%
Covariance 0.00433
Correlation 0.38822
Year Lyxor MSIndia Lyxor USDJIA Product of Deviation From the Mean
𝒙𝒊 𝒚𝒊 (𝒙𝒊 − 𝐱̅)(𝒚𝒊 − 𝐲̅)
2009 5.86% 5.56% -0.00112047
2010 22.40% 6.11% -0.006090764
2011 -27.07% 7.94% 0.003807121
2012 0.60% 18.29% -0.001989599
2013 -6.84% 17.09% -0.00759205
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2014 33.87% 14.20% 0.015504977
2015 -9.28% -4.71% 0.016801018
Mean 2.79% 9.21%
Covariance 0.00322
Correlation 0.19643
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4. Calculation of Betas
Calculate the betas of Lyxor ChinaH, Lyxor MSIndia, and Lyxor USDJIA. To calculate the
covariance with the market proxy, use the Lyxor World return data shown in Exhibit 1 in the case.
Assuming a risk-free rate of 2.5 per cent and a market risk premium of 5.5 per cent, what are the
required returns for each of the three ETFs?
Year Lyxor World Square of Deviation From the Mean
𝑹𝒊 (𝑹𝒊 − 𝐑̅ )𝟐
2009 7.69% 0.000008493
2010 5.79% 0.000480236
2011 -3.28% 0.012681977
2012 20.75% 0.016303642
2013 14.14% 0.003792800
2014 15.06% 0.005010617
2015 -4.28% 0.015034263
Mean 7.98%
Variance 0.008885338
Standard Deviation 9.426%
Year Lyxor ChinaH Lyxor World Product of Deviation
From the Mean
𝒙𝒊 𝒚𝒊 (𝒙𝒊 − 𝐱̅)(𝒚𝒊 − 𝐲̅)
2009 2.00% 7.69% -0.000065405
2010 4.25% 5.79% -0.000984891
2011 -29.40% -3.28% 0.032833499
2012 13.23% 20.75% 0.017204738
2013 8.86% 14.14% 0.005606939
2014 2.31% 15.06% 0.001808069
2015 -2.96% -4.28% 0.003329854
Mean -0.24% 7.98%
Covariance With Market 0.00996
Beta of Lyxor ChinaH 1.12044
Required Return 8.662%
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Year Lyxor Lyxor Product of Deviation
MSIndia World From the Mean
𝒙𝒊 𝒚𝒊 (𝒙𝒊 − 𝐱̅)(𝒚𝒊 − 𝐲̅)
2009 5.86% 7.69% -0.000089427
2010 22.40% 5.79% -0.004297078
2011 -27.07% -3.28% 0.033628234
2012 0.60% 20.75% -0.002798141
2013 -6.84% 14.14% -0.005931584
2014 33.87% 15.06% 0.021999189
2015 -9.28% -4.28% 0.014801296
Mean 2.79% 7.98%
Covariance With Market 0.00955
Beta of Lyxor MSIndia 1.07504
Required Return 8.413%
Year Lyxor Lyxor Product of deviation from
USDJIA World mean
2009 5.56% 7.69% 0.000106413
2010 6.11% 5.79% 0.000680696
2011 7.94% -3.28% 0.001435753
2012 18.29% 20.75% 0.011592591
2013 17.09% 14.14% 0.004854543
2014 14.20% 15.06% 0.003531472
2015 -4.71% -4.28% 0.01706546
Mean 9.21% 7.98%
Covariance with market 0.00654
Beta of Lyxor USDJIA 0.73655
required return 6.551%
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5. Calculation of Required rate of returns
Calculate the existing portfolio’s beta and the new portfolio’s beta. Assuming a risk-free rate of
2.5 per cent and a market risk premium of 5.5 per cent, what are their required returns?
Beta Required Return Mean Historical
Returns
Lyxor ChinaH 1.12044 8.662% -0.24%
Lyxor MSIndia 1.07504 8.413% 2.79%
Lyxor USDJIA 0.73655 6.551% 9.21%
Existing Portfolio:
60% Lyxor ChinaH, 1.10228 8.563% 0.97%
40% Lyxor MSIndia
New Portfolio:
40% Lyxor ChinaH, 0.99165 7.954% 3.503%
30% Lyxor MSIndia,
30% Lyxor USDJIA
The historical returns calculation for Lyxor USDJIA was higher than its required return after the
CAPM calculation. This means that the Lyxor USDJIA ETF falls above the SML line, and is
underpriced. Therefore, Susie should purchase this ETF.
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