You are planning to invest in the following stocks:
Rows 8 to 78 show the monthly closing prices of the stocks between 2010 and 2015.
The monthly data is collected from Yahoo Finance on 17th of December 2015. Ignore dividends for this question. Students used the prices that ignored dividends from Yahoo Finance
Date Rio Tinto Ltd (RIO.AX) Apple Inc. (AAPL) Cathay Pacific Airlines (0293.HK)
Jan-2010 68.00 27.44 12.80
Nov-2015 45.91 118.30 13.68
a. Design an Excel financial model that can help to evaluate this investment plan. Marks will be allocated for the presentation and clarity of your model (e.g., if there are clear headings, clear arrangement for input cells, appropriate use of colors, have some degree of flexibility, generate warning messages for wrong user inputs, etc.). The Excel financial model should enable you to consider the investment plan and answer the following questions.
b. For each stock, show the monthly stock returns.
c. Based on the responses in part (b), calculate the average monthly stock returns and standard deviation for each stock.
d. Calculate the correlation of monthly stock returns between each pair of stocks.
e. Suppose that you invest 20% in Apple Inc., 50% in Rio Tinto Ltd and 30% in Cathay Pacific Airlines. Calculate the portfolio expected return, variance and standard deviation.
f. How does the expected return and standard deviation change if you decide to invest 60% in Rio Tinto Ltd, 30% in Apple Inc. and 10% in Cathay Pacific Airlines? Explain your answers.
g. Find the weights of Apple Inc., Rio Tinto Ltd and Cathay Pacific Airlines that will provide a monthly return of 0.5% with the lowest level of risk.
h. Plot a scatter diagram showing the portfolios from parts (e), (f) and (g), with the X-axis displaying standard deviation and the Y-axis displaying monthly returns.
i. If the monthly risk-free rate is 0.1%, estimate the Sharpe ratio for the portfolios mentioned in parts (e), (f) and (g) and highlight the highest Sharpe ratio using