While your financial consulting partnership has the most up to date software for, among other things, portfolio analysis, you feel it would be of benefit to have Joan learn and demonstrate calculations specific to portfolio management. So that she can practice preparing actual high quality consulting reports, you give Joan the following assignment to prepare, in a "White Paper" format.
This paper will serve to not only demonstrate her knowledge of portfolio management which she can use with individual investors, but will also demonstrate to corporate CFO's the issues they need to be concerned about if the CFO's wish investors to be interested in adding their firms stock to their existing portfolios.
The White Paper should address the following
- In your own words, describe what portfolio management and the benefits of portfolio diversification are.
- Your answer must include words likevariability of returns,portfolio standard deviation, andnegative correlation of returns.
- Given the following information about two different stocks, calculate the average return and standard deviation of returns.Show all work.
|
Stock A
|
Stock B
|
|
Year
|
% return
|
% return
|
|
2005
|
15
|
15
|
|
2006
|
-5
|
35
|
|
2007
|
35
|
-5
|
|
2008
|
-10
|
40
|
|
2009
|
40
|
-10
|
|
|
|
|
Average Return
|
|
|
|
Standard Deviation
|
|
|
- Show expected return each year for a portfolio made up of 50% stock A, and 50% stock B.
|
Stock A
|
Stock B
|
Portfolio
|
|
Year
|
% return
|
% return
|
% return
|
|
2005
|
15
|
15
|
|
|
2006
|
-5
|
35
|
|
|
2007
|
35
|
-5
|
|
|
2008
|
-10
|
40
|
|
|
2009
|
40
|
-10
|
|
|
|
|
|
|
Average Return
|
|
|
|
|
Standard Deviation
|
|
|
|
- Based on your 2 calculations, what conclusions can you reach about risk and return when buying an individual stock, and when creating a portfolio?
- Explain what the CAPM is all about in terms of expected return on an individual stock and how a firm seeking to raise money by issuing new common stock would be concerned with the Beta of its common stock.