Introduction

Step 1: Collect Monthly Price Data

Step 2: Convert Prices to Monthly Returns
Step 3: Compute Mean and Standard Deviation
Step 4: Compute Portfolio Return and Risk
Step 5: Create a Scatter Plot
Step 6: Analyze the Results
Further Analysis: Optimizing the Portfolio

Course 2024-2025 in Risk and Portfolio

Management
Case Study: Analyzing Risk/Return Profiles of
Stock Portfolio

Salvatore Perdichizzi⋆
⋆
University of Padova

A.A. 2024/2025

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 Introduction
Step 1: Collect Monthly Price Data
Step 2: Convert Prices to Monthly Returns
Step 3: Compute Mean and Standard Deviation
Step 4: Compute Portfolio Return and Risk
Step 5: Create a Scatter Plot
Step 6: Analyze the Results
Further Analysis: Optimizing the Portfolio

Introduction

Today is March 31, 2022, and you have just started your new job
with a financial planning firm.
Your task: Review a portion of a client’s stock portfolio to
determine the risk/return profiles of 12 stocks.
Stocks involved: Archer Daniels Midland (ADM), Boeing (BA),
Caterpillar (CAT), Deere & Co. (DE), General Mills, Inc. (GIS),
eBay (EBAY), Hershey (HSY), IBM, JPMorgan Chase & Co.
(JPM), Microsoft (MSFT), Procter and Gamble (PG), Walmart
(WMT).

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 Introduction
Step 1: Collect Monthly Price Data
Step 2: Convert Prices to Monthly Returns
Step 3: Compute Mean and Standard Deviation
Step 4: Compute Portfolio Return and Risk
Step 5: Create a Scatter Plot
Step 6: Analyze the Results
Further Analysis: Optimizing the Portfolio

Step 1: Collect Monthly Price Data

Collect monthly price information for each stock for the past five
years.
Use sources like Yahoo! Finance to obtain "Adjusted Close" prices
(Use the file Data_Case.xlsx).
Adjusted Close prices take into account events like dividend
payments and stock splits.

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 Introduction
Step 1: Collect Monthly Price Data
Step 2: Convert Prices to Monthly Returns
Step 3: Compute Mean and Standard Deviation
Step 4: Compute Portfolio Return and Risk
Step 5: Create a Scatter Plot
Step 6: Analyze the Results
Further Analysis: Optimizing the Portfolio

Step 2: Convert Prices to Monthly Returns

Convert prices to monthly returns as the percentage change in the

monthly adjusted prices.
Create a separate worksheet within the Excel file to perform these
calculations.
Note: The first month will not have a return since it requires both a
beginning and an ending price.

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 Introduction
Step 1: Collect Monthly Price Data
Step 2: Convert Prices to Monthly Returns
Step 3: Compute Mean and Standard Deviation
Step 4: Compute Portfolio Return and Risk
Step 5: Create a Scatter Plot
Step 6: Analyze the Results
Further Analysis: Optimizing the Portfolio

Step 3: Compute Mean and Standard Deviation

Compute the mean monthly returns and standard deviations for the
monthly returns of each stock.
Convert monthly statistics to annual statistics:
Annual Mean Return = Monthly Mean Return × 12 √
Annual Standard Deviation = Monthly Standard Deviation × 12

Salvatore Perdichizzi Course 2024-2025 in Risk and Portfolio Management 5 / 16

 Introduction
Step 1: Collect Monthly Price Data
Step 2: Convert Prices to Monthly Returns
Step 3: Compute Mean and Standard Deviation
Step 4: Compute Portfolio Return and Risk
Step 5: Create a Scatter Plot
Step 6: Analyze the Results
Further Analysis: Optimizing the Portfolio

Step 4: Compute Portfolio Return and Risk

Add a column in your Excel worksheet for each month’s average

return across all stocks.
This column represents the monthly return of an equally weighted
portfolio of the 12 stocks.
Compute the mean and standard deviation of the monthly returns
for this portfolio.
Double-check: The average return of the portfolio should equal the
average return of all individual stocks.
Convert these statistics to annual values for interpretation.

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 Introduction
Step 1: Collect Monthly Price Data
Step 2: Convert Prices to Monthly Returns
Step 3: Compute Mean and Standard Deviation
Step 4: Compute Portfolio Return and Risk
Step 5: Create a Scatter Plot
Step 6: Analyze the Results
Further Analysis: Optimizing the Portfolio

Step 5: Create a Scatter Plot

Use the annual statistics to create an Excel plot:

Create three columns: Stock Ticker, Annual Standard Deviation, and
Annual Mean Return.
Highlight the last two columns and create an XY Scatter Plot.

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 Introduction
Step 1: Collect Monthly Price Data
Step 2: Convert Prices to Monthly Returns
Step 3: Compute Mean and Standard Deviation
Step 4: Compute Portfolio Return and Risk
Step 5: Create a Scatter Plot
Step 6: Analyze the Results
Further Analysis: Optimizing the Portfolio

Step 6: Analyze the Results

Compare the average of the volatilities (standard deviations) of the

individual stocks to the volatility of the equally weighted portfolio.
Observe how diversification impacts the overall portfolio risk
compared to the risk of individual stocks.

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 Introduction
Step 1: Collect Monthly Price Data
Step 2: Convert Prices to Monthly Returns
Step 3: Compute Mean and Standard Deviation
Step 4: Compute Portfolio Return and Risk
Step 5: Create a Scatter Plot
Step 6: Analyze the Results
Further Analysis: Optimizing the Portfolio

Further Analysis: Optimizing the Portfolio

Your manager was so impressed with your work analyzing the return and
standard deviations of the 12 stocks that he would like you to continue
your analysis. Specifically, he wants you to update the stock portfolio by:
Rebalancing the portfolio with the optimum weights that will provide
the best risk and return combinations for the new 12-stock portfolio.
Determining the improvement in the return and risk that would
result from these optimum weights compared to the current method
of equally weighting the stocks in the portfolio.
Use the Solver function in Excel to perform this analysis (the
time-consuming alternative is to find the optimum weights by trial and
error).

Salvatore Perdichizzi Course 2024-2025 in Risk and Portfolio Management 9 / 16

 Introduction
Step 1: Collect Monthly Price Data
Step 2: Convert Prices to Monthly Returns
Step 3: Compute Mean and Standard Deviation
Step 4: Compute Portfolio Return and Risk
Step 5: Create a Scatter Plot
Step 6: Analyze the Results
Further Analysis: Optimizing the Portfolio

Step 1: Begin with the Equally Weighted Portfolio

Establish the portfolio returns for the stocks in the portfolio using a
formula that depends on the portfolio weights.
Initially, these weights will all equal 1/12.
You would like to allow the portfolio weights to vary, so you will
need to list the weights for each stock in separate cells and establish
another cell that sums the weights of the stocks.
The portfolio returns for each month must reference these weights
for Excel Solver to be useful.

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 Introduction
Step 1: Collect Monthly Price Data
Step 2: Convert Prices to Monthly Returns
Step 3: Compute Mean and Standard Deviation
Step 4: Compute Portfolio Return and Risk
Step 5: Create a Scatter Plot
Step 6: Analyze the Results
Further Analysis: Optimizing the Portfolio

Step 2: Compute Portfolio Statistics

Compute the values for the monthly mean return and standard
deviation of the portfolio.
Convert these values to annual numbers (as you did before) for
easier interpretation.

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 Introduction
Step 1: Collect Monthly Price Data
Step 2: Convert Prices to Monthly Returns
Step 3: Compute Mean and Standard Deviation
Step 4: Compute Portfolio Return and Risk
Step 5: Create a Scatter Plot
Step 6: Analyze the Results
Further Analysis: Optimizing the Portfolio

Step 3: Compute the Efficient Frontier

Compute the efficient frontier when short sales are not allowed. Use
the Solver tool in Excel (on the Data tab in the analysis section).
Solver Parameters:
a. Set the target cell as the cell of interest, making it the cell that computes the
(annual) portfolio standard deviation. Minimize this value.
b. Establish the “By Changing Cells” by holding the Control key and clicking in each of
the 12 cells containing the weights of each stock.
c. Add constraints by clicking the Add button next to the “Subject to the Constraints”
box. One set of constraints will be the weight of each stock that is greater than or equal
to zero. Calculate the constraints individually. A second constraint is that the weights
will sum to one.
d. Compute the portfolio with the lowest standard deviation. If the parameters are set
correctly, you should get a solution when you click “Solve.” If there is an error, you will
need to doublecheck the parameters, especially the constraints.

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 Introduction
Step 1: Collect Monthly Price Data
Step 2: Convert Prices to Monthly Returns
Step 3: Compute Mean and Standard Deviation
Step 4: Compute Portfolio Return and Risk
Step 5: Create a Scatter Plot
Step 6: Analyze the Results
Further Analysis: Optimizing the Portfolio

Step 4: Explore Different Target Returns

Compute portfolios that have the lowest standard deviation for a
target level of the expected return.
Steps:
a. Start by finding the portfolio with an expected return 2% higher
than that of the minimum variance portfolio. To do this, add a
constraint that the (annual) portfolio return equals this target level.
Click “Solve” and record the standard deviation and mean return of
the solution (and be sure the mean return equals target—if not,
check your constraint).
b. Repeat Step (a) raising the target return in 2% increments,
recording the result for each step. Continue to increase the target
return and record the result until Solver can no longer find a solution.
c. At what level does Solver fail to find a solution? Why?

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 Introduction
Step 1: Collect Monthly Price Data
Step 2: Convert Prices to Monthly Returns
Step 3: Compute Mean and Standard Deviation
Step 4: Compute Portfolio Return and Risk
Step 5: Create a Scatter Plot
Step 6: Analyze the Results
Further Analysis: Optimizing the Portfolio

Step 5: Plot the Efficient Frontier

Plot the efficient frontier with the constraint of no short sales.

Create an XY Scatter Plot (similar to what you did in the past
exercise), with portfolio standard deviation on the x-axis and the
return on the y-axis, using the data for the minimum variance
portfolio and the portfolios you computed in Step 4.
How do these portfolios compare to the mean and standard
deviation for the equally weighted portfolio analyzed before?

Salvatore Perdichizzi Course 2024-2025 in Risk and Portfolio Management 14 / 16

 Introduction
Step 1: Collect Monthly Price Data
Step 2: Convert Prices to Monthly Returns
Step 3: Compute Mean and Standard Deviation
Step 4: Compute Portfolio Return and Risk
Step 5: Create a Scatter Plot
Step 6: Analyze the Results
Further Analysis: Optimizing the Portfolio

Step 6: Allow for Short Sales

Redo your analysis to allow for short sales by removing the

constraint that each portfolio weight is greater than or equal to zero.
Use Solver to calculate the (annual) portfolio standard deviation for
annual returns from the minimum variance portfolio, raising the
target return in 2% increments, recording the result for each step.
Plot the unconstrained efficient frontier on an XY Scatter Plot.
How does allowing short sales affect the frontier?

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 Introduction
Step 1: Collect Monthly Price Data
Step 2: Convert Prices to Monthly Returns
Step 3: Compute Mean and Standard Deviation
Step 4: Compute Portfolio Return and Risk
Step 5: Create a Scatter Plot
Step 6: Analyze the Results
Further Analysis: Optimizing the Portfolio

Step 7: Add a Risk-Free Security

Redo your analysis adding a new risk-free security that has a return
of 0.25% (0.0025) each month (3.00% yearly) (Hint: The volatility
of the risk-free security is 0).
Include a weight for this security when calculating the monthly
portfolio returns. That is, there will now be 13 weights, one for each
of the 12 stocks and one for the risk-free security. Again, these
weights must sum to 1.
Allow for short sales and use Solver to calculate the (annual)
portfolio standard deviation when the annual portfolio returns are set
to 3%, 10%, 20%, 30%, 40% and 50%.
Plot the results on the same XY Scatter Plot, and in addition, keep
track of the portfolio weights of the optimal portfolio.
What do you notice about the relative weights of the different stocks
in the portfolio as you change the target return? Can you identify
the tangent portfolio?
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