Instructions

Page 1

Portfolio Assignment

You have a client whose portfolio is distributed as follows:

GPU 0.00%

Teledyne 25.00%

Kodak 25.00%

Thai Fund 0.00%

Merck 0.00%

ATT 50.00%

TOTAL 100%

His expectations for the returns in each stock are the following:

GPU 12.67%

Teledyne 13.96%

Kodak 14.02%

Thai Fund 20.75%

Merck 17.81%

ATT 11.26%

What is his portfolio expected return? His portfolio risk?

Use the attached portfolio model to reallocate his portfolio in

such a way as to improve his return and risk

Giddy's Foundations of Finance

Page

Portfolio Return and Risk Computation

PORTFOLIO EXPECTED RETURN PORTFOLIO VARIANCE

CORRELATION MATRIX

ASSET RETURN WEIGHT PRODUCT STD DEV CAN FR GER JAP UK USA

1 GPU 0.1267 0.00% 0 0.1715 1

2 Teledyne 0.1396 25.00% 0.0349 0.2893 0.44 1

3 Kodak 0.1402 25.00% 0.0351 0.3082 0.17 0.65 1

4 Thai Fund 0.2075 0.00% 0 0.3278 0.22 0.44 0.24 1

5 Merck 0.1781 0.00% 0 0.341 0.35 0.15 0.13 0.03 1

6 ATT 0.1126 50.00% 0.0563 0.1606 0.68 0.4 0.43 0.23 0.6327 1

TOTAL 100%

Portfolio Variance 3.48%

Portfolio return ### Portfolio Std Deviation ###

Weights matrix Variance-covariance matrix

0 0 0 0 0 0 0.03 0.02 0.01 0.01 0.0204 0.0189

0 0.0625 0.0625 0 0 0.1 0.02 0.08 0.06 0.04 0.0151 0.0187

0 0.0625 0.0625 0 0 0.1 0.01 0.06 0.09 0.02 0.0138 0.0214

0 0 0 0 0 0 0.01 0.04 0.02 0.11 0.0039 0.012

0 0 0 0 0 0 0.02 0.02 0.01 0 0.1163 0.0346

0 0.125 0.125 0 0 0.3 0.02 0.02 0.02 0.01 0.0346 0.0258

Giddy's Foundations of Finance

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Efficient Frontier

Page 4

The Efficient Frontier

OPTIMAL PORTFOLIOS

Given Best Composition

Return Std. Dev. GPU Teledyne

ALL ATT 0.1126 0.1606 0.1126 0% 0%

0.115 0.1548 0.115 17% 0%

0.12 0.1494 0.12 33% 0%

0.125 0.1475 0.125 36% 0%

MIN RISK 0.1283 0.1471 0.1283 38% 0%

0.13 0.1472 0.13 39% 0%

0.14 0.1509 0.14 44% 0%

0.15 0.1572 0.15 50% 0%

0.16 0.168 0.16 43% 0%

0.17 0.184 0.17 30% 0%

0.18 0.2045 0.18 17% 0%

0.19 0.2282 0.19 4% 0%

MAX RETURN 0.2075 0.3278 0.2075 0% 0%

ORIGINAL 12.63% 18.66% 0.12625 0% 25%

0.1 0.15 0.2 0.25 0.3 0.35

0

0.05

0.1

0.15

0.2

0.25

Efficient Frontier

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Kodak Thai Fund Merck ATT

0% 0% 0% 100%

0% 0% 0% 83%

5% 2% 0% 60%

6% 6% 0% 52%

6% 9% 0% 47%

7% 11% 0% 44%

9% 16% 5% 25%

12% 20% 11% 7%

11% 28% 18% 0%

9% 37% 24% 0%

7% 46% 30% 0%

5% 55% 36% 0%

0% 100% 0% 0%

25% 0% 0% 50%

Optimal Port.

Page 6

Which is the Optimal Portfolio?

Given the Risk-Free rate is: 5.00%

OPTIMAL PORTFOLIOS

Risk Ratio

Return Std. Dev. Premium RP/SD

GPU 0.1126 0.1606 6.26% 0.390

0.115 0.1548 6.50% 0.420

0.12 0.1494 7.00% 0.469

0.125 0.1475 7.50% 0.508

MIN RISK 0.1283 0.1471 7.83% 0.532

0.13 0.1472 8.00% 0.543

0.14 0.1509 9.00% 0.596

0.15 0.1572 10.00% 0.636

0.16 0.168 11.00% 0.655

0.17 0.184 12.00% 0.652

0.18 0.2045 13.00% 0.636

0.19 0.2282 14.00% 0.613

THAI 0.2075 0.3278 15.75% 0.4800.1 0.15 0.2 0.25 0.3 0.35

0

0.05

0.1

0.15

0.2

0.25

That's the one!

Optimal Port.

Page 7

0.1 0.15 0.2 0.25 0.3 0.35

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0.05

0.1

0.15

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Opt 2-asset

Page 8

What is the optimal portfolio for 2 funds?

US UK

ER 18% 12%

SD 20% 5%

Corr coefft 50%

RF 10%

Weight of UK in optimal portfolio:

Formula (Ch 7 footnote 3):

Numerator 0.0004

Denominator 0.0005

Ratio 80%

Port. Beta

Page 9

You own a stock portfolio invested 30% in Intel, 20% in

IBM, 10% in Gateway 2000, and 40% in Microsoft.

The betas for these four stocks are 1.2, .6, 1.5, and .8,

respectively.

What is the portfolio beta?

Weights Beta Weighted beta

Intel 0.3 1.2 0.36

IBM 0.2 0.6 0.12

Gateway 0.1 1.5 0.15

Microsoft 0.4 0.8 0.32

Portfolio 0.95

Optional assignment: Go to morningstar.net and find the estimated betas for these companies; plug them in.