Finance and Accounting:
Daniel is in the process of analyzing Mihaela’s portfolio. Ms. Mihaela owns a substantial number of shares of the common stocks of Exxon, General Mills, Minnesota, Mining, and Manufacturing (3M), and Sears, Roebuck & Company, and she wants him to manage her portfolio. Dan tries to convince Mihaela of the benefits of adding additional securities including fixed income to her portfolio. Based on the information given below on four securities in Mihaela’s portfolio, answer the following questions:
1. Why did Dan try to convince Mihaela of the need to add securities to her portfolio four stocks? Explain clearly
2. Assuming an equal dollar investment in each stock, how many different combinations of portfolios can Mihaela form with the four stocks? Without equal dollar investment in each stock, how many portfolios can be formed? Why?
3. Using the data given below and assuming an equal dollar investment in each stock, calculate the expected return and standard deviation of each portfolio.
4. Using return and risk statistics from part 3, plot them and determine the efficient frontier. Identify the portfolios on efficient frontier.
5. What are the shortcomings of the approach suggested in questions 3 and 4 above? Does it really help you identify efficient portfolios?
Table: Ms. Mihaela’s Portfolio
Quarterly
Returns (%)
1995 EXXON GENERAL MILLS 3M SEARS, ROEBUCK
1 -13.023 24.981 8.263 22.721
2 1.639 14.592 -7.723 6.612
3 -6.593 -4.198 -11.739 -14.468
4 2.811 1.143 10.8 2.109
1996 1 -7.6 8.46 1.468 19.938
2 1.333 9.831 0.826 3.763
3 3.604 7.069 20.986 17.239
4 8.929 10.896 19.136 36.156
1997 1 6.303 8.636 5.267 17.859
2 11.741 6.114 8.256 18.875
3 10.519 -11.52 0.239 -10.864
4 4.589 9.065 0.241 2.753
1998 1 5.485 -9.789 -10.718 -7.569
2 7.702 14.231 7.182 -2.76
3 11.902 5.327 0.843 7.892
4 2.458 8.064 5.091 -7.032
1999 1 13.556 -0.323 5.723 8.866
2 8.905 10.426 -4.103 13.743
3 -2.135 -2.46 -1.442 -13.186
4 8 0.301 19.243 19.97
2000 1 2.766 22.389 18.273 28.051
2 10.807 12.566 8.931 -1.131
3 11.951 -3.97 10.747 -16.619
4 5.613 9.814 16.795 1.107
2001 1 23.565 19.003 11.73 29.245
2 9.796 9.696 10.284 0.491
Correlation Coefficient of Quarterly Holding Period Returns
EXXON GENERAL MILLS 3M SEARS, ROEBUCK
EXXON
1.000
-0.147
-0.060
0.002
GENERAL
MILLS
-0.147
1.000
0.248
0.395
3M
-0.060
0.248
1.000
0.483
SEARS, ROEBUCK
0.002
0.395
0.483
1.000