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MTE Assignment 5

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3 views7 pages

MTE Assignment 5

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Uploaded by

b14.kopf96
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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PART I

1. (4 points) You have collected the data about Bitcoin prices in the last 8 months:

(a) What is the average monthly return? What is the return over the period of seven months
(Jan-Aug)?
(b) What is the variance of the returns?
(c) What is the standard deviation of the returns?

𝑃𝑟𝑖𝑐𝑒𝑡ℎ𝑖𝑠𝑚𝑜𝑢𝑡ℎ− 𝑃𝑟𝑖𝑐𝑒𝑙𝑎𝑠𝑡𝑚𝑜𝑛𝑡ℎ
a) 𝑀𝑜𝑛𝑡ℎ𝑙𝑦 𝑟𝑒𝑡𝑢𝑟𝑛 = 𝑃𝑟𝑖𝑐𝑒𝑙𝑎𝑠𝑡𝑚𝑜𝑛𝑡ℎ

=> Average return = Average of all Monthly return = - 7%

𝑃𝑟𝑖𝑐𝑒𝐴𝑢𝑔− 𝑃𝑟𝑖𝑐𝑒𝐽𝑎𝑛
𝑇𝑜𝑡𝑎𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 = 𝑃𝑟𝑖𝑐𝑒𝐽𝑎𝑛
= - 47.9 %
b) Variance = VAR(all monthly return) = 0.039
c) STD = sqrt(Variance) = 0.197
2. (10 points) Consider an economy with two types of firms, S and I. S firms all move
together. I firms move independently. For both types of firms, there is a 60%
probability that the firms will have a 15% return and a 40% probability that the firms
will have a -10% return.
a. What is the volatility (standard deviation) of a portfolio that consists of an
equal investment in 20 firms of (i) type S, and (ii) type I? (5 points)
b. Plot the volatility as a function of the number of firms in the two portfolios. (5
points)

a) p1 = 60% p2=40% R1 = 15% R2=-10%

E(R) = p1*R1 + p2*R2 = 1/20


Variance = p1*(R1-E(R))^2 + p2*(R2-E(R))^2 = 3/200

i. For a portfolio of S firms, since all firms move together, the portfolio behaves
exactly like a single firm. Therefore, the standard deviation of the portfolio is the
same as that of a single S firm.

𝑆𝑇𝐷 = 𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒 = 0. 122

ii. For a portfolio of I firms, where the firms move independently, the risk (volatility) of
the portfolio decreases due to diversification. The standard deviation of such a
portfolio is given by:

𝑆𝑇𝐷𝑓𝑖𝑟𝑚 0.122474
𝑆𝑇𝐷𝑝𝑜𝑟𝑡 = = = 0. 027
𝑛 20

3. (6 points) Answer the following questions. Provide explanations for your choice.
(a) An investor considers adding security to his/her portfolio. The volatility of
the portfolio reduces by most if the correlation between the existing portfolio and the
new security is equal:
i) -1.0
ii) 0
iii) 1.0
(b) Consider the following statement: "If two stocks move together, their
returns will tend to be above or below average at the same time, and the
covariance will be positive." You think that the statement is:
i) Correct
ii) False

a) Correlation of -1.0: This implies negative correlation.


Correlation of 0: This implies no correlation.
Correlation of 1.0: This implies positive correlation.
If the volatility reduces, the correlation is -1. This negative correlation means that the
new security moves in the exact opposite direction to the existing portfolio.

b) Correct: Covariance is a measure used to gauge the directional relationship between


two asset returns. When two stocks move together, meaning they tend to increase or
decrease in value simultaneously, their returns exhibit a positive relationship. This is
precisely what positive covariance indicates.

4. (15 points) You are given the following sample:

(a) What is the median dividend yield for the S&P 500 over the period?

𝐷𝑖𝑣 𝑌𝑖𝑒𝑙𝑑𝑖 = 𝐷𝑖𝑣𝑖+1 / 𝑃𝑖


Median = 2%

The last data is 2021, so we calculate until 2020

(b) What is the volatility of the dividend yield over the period?

𝑁
1 2
𝑉𝑜𝑙 = 𝑆𝑇𝐷 = 𝑛−1
* ∑ (𝐷𝑖𝑣 − 𝐷𝐼𝑉) = 0, 0038 = 0.38%
𝑛=1

(c) What is the median capital gain rate of the S&P 500 over the period?

𝑃𝑖+1−𝑃𝑖
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑔𝑎𝑖𝑛𝑖 = 𝑃𝑖

As for the DivYield, we only calculate until 2020


We use MEDIAN function on excel and find => Median = 0.11
(d) What is the variance of S&P 500 returns from capital gains over the
period?

𝑁
1 2
𝑉𝑎𝑟 = 𝑛−1
* ∑ (𝐶𝐺𝑖 − 𝐶𝐺) = 0, 028 = 2.8%
𝑛=1

(e) What is the average total return of the S&P 500 over the period?

𝑇𝑜𝑡𝑎𝑙 𝑟𝑒𝑡𝑢𝑟𝑛𝑖 = 𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝐺𝑎𝑖𝑛𝑖 + 𝐷𝑖𝑣𝑌𝑖𝑒𝑙𝑑𝑖

We use the function AVERAGE on excel and find


=> Average = 0,09 = 9%
(f) What is the variance of S&P 500 total returns over the period?
𝑁
1 2
𝑉𝑎𝑟 = 𝑛−1
* ∑ (𝑇𝑜𝑡𝑎𝑙𝑅𝑒𝑡𝑢𝑟𝑛𝑖 − 𝑇𝑜𝑡𝑎𝑙𝑅𝑒𝑡𝑢𝑟𝑛) = 0, 029=2.83%
𝑛=1
Part ɪɪ

1. Calculations:

monthly mean:

annual mean = 12*

annual standard deviation = 12*

2. Plot:

3. Comparison:

As we can see with this table on the left the


portfolio is a balance of the firms returns and
volatilities. Indeed even if it’s possible to obtain a
bigger return with AAPL stock, it means to have a
higher volatility and then more risks. This is exactly
the purpose of a portfolio. To accept to do less profit
but to decrease the volatility.
Part III :

The values used to find these curves are the following :

annual weighted mean 5,00% 9,00% 11,00% 13,00% 15,00% 20,00% 25,00% 30,00% 36,23% 40%

annual weighted std 20,75% 13,14% 11,94% 11,60% 11,60% 12,77% 15,29% 18,91% 26,99%
annual weighted std
(n-constrained) 13,37% 11,94% 11,48% 11,22% 11,17% 11,95% 13,83% 16,42% 22,73%

All the weights obtained for the different configurations are in the Excel file attached
to this report. It can be seen that the portfolio without short sales cannot reach an
annual return of 40%. It is related to the fact that the highest annual mean return
comes from AAPL and is 36,23%, which is exactly the highest annual weighted
mean found by the Solver. It makes sense, because without short sales, the highest
return is obtained when taking 100% of AAPL.

The plot obtained for both efficient frontiers is the following :

With the shift to the left, we see that it is possible to decrease the volatility and so the
risk for the same return when using short sales.

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