Group Assignment I

Course:​ Corporate Finance

Coursecode:​ 2FE193
Examiner: ​Maziar Sahamkhadam and,
Andreas Stephan
Semester:​ Autumn 18
Date: ​2019-01-05
Group: ​3
Linnéuniversitetet Växjö

Authors:
Anna Asplund 910727-3949
[email protected]
Anna Olin 970114-7861
[email protected]
Julia Johnsson 960809-0909
[email protected]
Chapter 10 - Data Case
1. ​Below we have the twelve different 'adjusted close' for each stock that we collected from Yahoo.
Table 1.1

2. ​Using the information from Table 1.1, the monthly returns were calculated as the percentage
change in monthly prices for each stock. To calculate the percentage change we used the equation
P t+1 − P t
Rt+1 = Pt . We subtracted one month's price with the previous month's price and then divided it
with the previous month's price. The monthly returns for the stocks can be seen in table 1.2.
Table 1.2. Monthly returns for twelve stocks and the equally weighted portfolio

3. To find out mean monthly return we used the equation for ‘​average of realized annual return’​ :

By summing up all percentage changes for the specific stock and then divide the amount with 58
(because there is 58 values) we got the mean monthly returns.​ Then we converted the average monthly
return to the average annual return by multiplying the values by 12. The mean monthly returns and the
average annual return can be seen in table 1.3.
The standard deviation for each of the stock was calculated by using the standard deviation function in
excel. This function is based on the following formula, which also can be described as the square root
of the variance.

To convert monthly standard deviations to annual standard deviation, the monthly standard deviation
was multiplied by √12 . ​The monthly standard deviations and the annual standard deviations can be
seen in table 1.3.

4. To calculate the monthly returns for the equally weighted portfolio, the values for all stocks ​was
summarized and then divided by 12, as there is 12 stocks in the portfolio with equally weights. The
calculated values can be seen in Table 1.2 under the weighted portfolio column. When we calculated
the mean annual return and the annual standard deviation for the equally weighted portfolio we used
the same formulas as for the individual stocks but with the values from the equally weighted portfolio.
The results can be seen in table 1.3.

Table 1.3.
Simulations ADM BA CAT DE GIS EBAY HSY IBM JPM MSFT PG WMT Weighted
portfolio

Mean monthly -0.87% 0.95% -0.24% -0.40% -1.49% -0.41 -1.19% -1.75% 0.08% 0.43% -1.30% -1.11% -0.61%
return %

Mean annual -10.42% 11.38% -2.85% -4.85% -17.93% -4.94 -14.25 -20.94% 0.98% 5.17% -15.64% -13.38 -7.31%
return % % %

Monthly Stan 14.24% 14.74% 14.49% 14.00% 13.65% 14.89 13.89% 13.73% 14.22 14.32% 13.39% 13.90% 13.26%
dard deviations % %

Annual Standard 49.32% 51.06% 50.19% 48.51% 47.29% 51.57 48.12% 47.56% 49.24 49.61% 46.37% 48.15% 45.94%
deviation % %
5. For the annual statistics that include annual standard deviation and mean annual return we made a
scatterplot. This is an easy way to get an overall picture of the risk (volatility) and return.

Scatterplot 1.1.

6. In Scatterplot 1.1, there is a correlation between risk and return. High-risk shares generate higher
returns and low risk stocks generate less risk. A portfolio of the 12 shares together significantly
reduces the risk compared to a single stock. By splitting the capital in a portfolio of all 12 stocks
instead of one individual, the firm specific for each stock risk is spread out and is not as apparent. It is
in accordance with the phrase "do not put all eggs in the same basket". The equally weighted portfolio
generates an average return for a lower risk.
Chapter 11 - Data case
1. We started with picking up the table about the monthly returns for each stock’s and the equally
weighted portfolio (EQW). We also added a column for r​f​ for later computations.

Table 1.1.1. Basic information

To find out the optimum weights for our portfolio we began with establishing the return for the
1
equally weighted portfolio. The weights will all equal 12 (≈ 0.08) as there is 12 stocks and all stocks
have the same weights. We listed the weights for each stock individual in 12 cells as can be seen in
table 1.1.1.1. The sum of all stock’s weights equals 1.

Table 1.1.1.1.
2. Then we calculated an average of all the monthly returns of the equally weighted portfolio.
Information about the monthly returns were picked up from the information in table 1.1.1. We
multiplied the value with 12 to convert it to the mean annual return, which is the equally weighted
portfolio’s return. For the standard deviation we used the standard deviation function in excel on all of
the equally weighted portfolio’s monthly returns. Thereafter we added all these values and multiplied
the sum with the square root of 12 to convert it to the annual standard deviation. That is the portfolio’s
standard deviation. The values can be found in table 1.1.2.

Table 1.1.2.

3 -7. First we calculated 1 divided by 12 as initial weights for no short selling, as in question 1. The
sum equals one. Then we computed the average return for the portfolio with no short selling in the
same way we did in question 2 but by using the column ‘​Solver port. No short. No rf​’ in table 1.1.3.1.
for the solver portfolio with no short selling. For the standard deviation we used the standard
deviation function in excel on all of the ‘solver portfolio with no short selling’s returns multiplied
with the square root of 12, which we also did in question 2.

The same methods are also used when we calculated the portfolios with short selling but in that case
we used ‘solver portfolio with short selling’ in table 1.1.3.1. when return and standard deviation was
calculated.

For the portfolio that included a security with risk free rate and no short selling, there was 13
stocks/values instead of 12, so instead of dividing 1 by 12 to determine the weights, we divide 1 by
13. To calculate the portfolio’s return and standard deviation we used the same methods as for the
other portfolios but we used the column ‘​Solver port. With short. With rf’​ ’ instead.

Thereafter, we computed the efficient frontier when short sales are not allowed using the solver tool in
excel.
1. We sat the target cell as the cell of interest, making it the cell that computes the (annual)
portfolio standard deviation. Minimizing this value.
2. Then we established the ’Changing Cells’ by holding the Control key and clicking in each of
the 12 cells containing the weights of each stock.
3. Thereafter we added the constraints by clicking the Add button next to the ’Subject to the
Constraints’ box. One set of constraints will be the weight of each stock that is greater than or
equal to zero. Then we calculated the constraints individually. The second constraint is that
the weights will sum to one.
4. At last we computed the portfolio with the lowest standard deviation.

We did these for all of the different portfolios but for the portfolio​ ​with no short selling the value of
the return is supposed to be equal or greater than zero. In short selling the return are allowing negative
values and the return is supposed to be equal or less than zero. For the computation of the portfolio
with a risk-free security we have 13 values instead of 12 as can be seen in table 1.1.3.
Table 1.1.3.

Table 1.1.3.1.
We computed portfolios that had the lowest standard deviation for a target level of the expected
return. This was issued in several different stages.

Firstly we added 2% to the expected return, which can be seen in table 1.1.4. and used excel´s solver
function to calculate the standard deviations. We added a constraint in the solver function that equaled
the portfolio return with the different target returns. The constraints that the sum is equal to 1 and that
the portfolio’s weight is higher or equal to zero is still used in this calculations. We used the solver
function and our standard deviations for the different target returns were computed. This standard
deviations can be seen in table 1.1.4.

At a return level of 0.33 does solver fail to find a solution. The reason for this failure is that the
portfolio can not achieve a return of 0.33 procent with the current numbers. The highest return this
portfolio can achieve is 0.3, which we also calculated in excel's solver function.

Table 1.1.4.

The orange line in Scatterplot 1.1.2 represent the efficient frontier with the constraint of no short
selling. The equally weighted portfolio had a return of 0.13 while the volatility was 0.1. As you can
see in Scatterplot 1.1.2. the equally weighted portfolio would be plotted on the efficient frontier for no
short sales.

We repeated the computation with the solver for the portfolio where we allowed short sales but we
removed the constraint that each portfolio weight is greater than or equal to zero. We used solver to
calculate the annual portfolio standard deviation for the minimum variance portfolio. You can find the
different values in table 1.1.6. We also plotted the efficient frontier for the portfolios where short sales
is allowed as the blue line in Scatterplot 1.1.2. When we allowed short selling the efficient frontier
turned to the left which gives more portfolio opportunities.
Table 1.1.6.

For the portfolio that includes a risk-free security we used the same method as before. The results that
we got from the Solver function can be found in table 1.1.7. We plotted the efficient frontier in
Scatterplot 1.1.2 and the portfolios represent the grey line.

The tangent portfolio is found when the efficient frontier that includes a security with a risk-free rate
tangents the efficient frontier that allows for short selling. The tangent portfolio is above but close to
the last portfolio with short selling that we calculated with a volatility of 0.2737 and a return of 0.55.

Table 1.1.7.
Scatterplot 1.1.2.

Orange line: The efficient frontier with no short selling are not allowed
Blue line: The efficient frontier with short selling allowed
Grey line: The efficient frontier with short selling and including a security with risk-free rate, r​f