Risk and Return

This assignment will require you to analyze time series of monthly returns for different securities. [5 points] 1) Select three companies as follows from Yahoo! Finance website (https://finance.yahoo.com/): a) S&P 500 (ticker=^GSPC) b) Pick Company 1, a company of your choice and note the “Sector” and “Industry” to which it belongs. Hint: Go to Yahoo! Finance website, enter the ticker symbol under Quote Lookup. Then, click on “Profile” to check the sector/industry it belongs to). c) Pick Company 2 that belongs to a different sector or industry than Company 1. d) Enter the name of the two companies you selected, along with their ticker symbol and sectors, under “Mini-case 1 (State names of selected companies)” Forum. If someone else has already posted your companies then you need to pick another set of companies. Please note that, if you pick companies that have already been selected by one of your colleagues, you will receive a grade of zero for subsequent analyses in this Mini-case. [5 points] 2) Download the MONTHLY price data for the 01/01/2016 – 12/31/2020 period for the three securities. Instructions on how to download price data from Yahoo! Finance website: i. Go to Yahoo! Finance website, enter the security’s ticker symbol in “Quote Lookup” box. Then, click on “Historical Data”. Enter “Time Period” as given above. For “Frequency”, make sure Monthly is selected and then click on “Apply”. Click on “Download Data”. A ticker.csv file will be downloaded. ii. Save your file as a .xls or .xlsx file before you start anything – very important step! Comma delimited (.csv) files do not retain the formulae and cell references after closing the file. You will receive a grade of zero if your excel file does not contain cell references and formulae that show how you arrived at the various answers. iii. You only need the “Date” and “Adj Close” columns. Copy over the “Date” and “Adj Close” columns of the three securities into a single excel so you can do the analysis. (Note: the “Adj Close” column in Yahoo! Finance has already adjusted the prices for dividends and stock splits so you do not have to adjust for it again. [20 points] 3) Calculate the MONTHLY return data for the 01/01/2016 – 12/31/2020 period for the selected three securities. Note: Return for Month 2 = (Adj Close for Month 2/Adj Close for Month 1) – 1 [7 points] 4) Calculate the average arithmetic monthly return, variance, and standard deviation of returns for 01/01/2016 – 12/31/2020 period for the selected three securities. FIN 5130 Mini-case 1 Real-world Application: Risk and Return Dr. Darshana Palkar Page 2 of 2 [8 points] 5) Calculate the covariance and correlation of returns between Company A and Company B for the 01/01/2016 – 12/31/2020 period. What does the correlation indicate? [15 points] 6) Calculate the stock betas for Company A and Company B for the 01/01/2016 –12/31/2020 period. What do the betas indicate? Hint: What is a proxy for the market portfolio? What should go in the known-xs array and what should go in the known-ys array? [25 points] 7) Suppose you invest 50% in Company A and 50% in Company B. What is your portfolio average return and standard deviation? [15 points] 8) Compare the average return and standard deviation of Company A and Company B from #4 with the portfolio average return and standard deviation from #7. What do you observe? What can you conclude from your findings?

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