Instructions

Giddy's Foundations of Finance

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:
12.67%
GPU
13.96%
Teledyne
14.02%
Kodak
20.75%
Thai Fund
17.81%
Merck
11.26%
ATT
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

Page1

Giddy's Foundations of Finance

Portfolio Return and Risk Computation

PORTFOLIO EXPECTED RETURN

ASSET
RETURN
1 GPU
0.1267
2 Teledyne
0.1396
3 Kodak
0.1402
4 Thai Fund
0.2075
5 Merck
0.1781
6 ATT
0.1126
TOTAL

Portfolio return

Weights matrix
0
0
0
0.0625
0
0.0625
0
0
0
0
0
0.125

0
0.0625
0.0625
0
0
0.125

WEIGHT
0.00%
25.00%
25.00%
0.00%
0.00%
50.00%
100%

###

0
0
0
0
0
0

PRODUCT
0
0.0349
0.0351
0
0
0.0563

PORTFOLIO VARIANCE
CORRELATION MATRIX
STD DEV CAN FR
GER JAP UK
USA
0.1715
1
0.2893 0.44
1
0.3082 0.17 0.65
1
0.3278 0.22 0.44 0.24
1
0.341 0.35 0.15 0.13 0.03
1
0.1606 0.68 0.4 0.43 0.23 0.6327

Portfolio Variance
Portfolio Std Deviation

3.48%
###

Variance-covariance matrix
0.03 0.02 0.01 0.01 0.0204
0.02 0.08 0.06 0.04 0.0151
0.01 0.06 0.09 0.02 0.0138
0.01 0.04 0.02 0.11 0.0039
0.02 0.02 0.01
0 0.1163
0.02 0.02 0.02 0.01 0.0346

0
0
0 0.1
0 0.1
0
0
0
0
0 0.3

Page

0.0189
0.0187
0.0214
0.012
0.0346
0.0258

12
10
8
6
4
2
0
0

Page

10

12

EfficientFrontier

The Efficient Frontier

OPTIMAL PORTFOLIOS
Given
Best
Return
Std. Dev.
0.1126
0.1606
0.1126
0.115
0.1548
0.115
0.12
0.1494
0.12
0.125
0.1475
0.125
0.1283
0.1471
0.1283
0.13
0.1472
0.13
0.14
0.1509
0.14
0.15
0.1572
0.15
0.16
0.168
0.16
0.17
0.184
0.17
0.18
0.2045
0.18
0.19
0.2282
0.19
0.2075
0.3278
0.2075
12.63%
18.66% 0.12625

ALL ATT

MIN RISK

MAX RETURN
ORIGINAL

Composition
GPU
Teledyne Kodak
0%
0%
0%
17%
0%
0%
33%
0%
5%
36%
0%
6%
38%
0%
6%
39%
0%
7%
44%
0%
9%
50%
0%
12%
43%
0%
11%
30%
0%
9%
17%
0%
7%
4%
0%
5%
0%
0%
0%
0%
25%
25%

0.25

0.2

0.15

0.1

0.05

0
0.1

0.15

0.2

0.25

0.3

Page4

0.35

EfficientFrontier

Thai Fund Merck

ATT
0%
0%
100%
0%
0%
83%
2%
0%
60%
6%
0%
52%
9%
0%
47%
11%
0%
44%
16%
5%
25%
20%
11%
7%
28%
18%
0%
37%
24%
0%
46%
30%
0%
55%
36%
0%
100%
0%
0%
0%
0%
50%

Page5

OptimalPort.

Which is the Optimal Portfolio?

Given the Risk-Free rate is:

5.00%

0.25

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%
0.480

That's the one!

0.2

0.15

0.1

0.05

0
0.1

Page6

0.15

0.2

0.25

0.3

0.35

OptimalPort.

0.25

0.3

0.35

Page7

Opt2asset

What is the optimal portfolio for 2 funds?

ER
SD
Corr coefft
RF

US
18%
20%

UK
12%
5%
50%
10%

Weight of UK in optimal portfolio:

Formula (Ch 7 footnote 3):
Numerator
0.0004
Denominator
0.0005
Ratio

80%

Page8

Port.Beta

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?

Intel
IBM
Gateway
Microsoft
Portfolio

Weights
Beta
0.3
0.2
0.1
0.4

1.2
0.6
1.5
0.8

Weighted beta
0.36
0.12
0.15
0.32
0.95

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

Page9