Theory of Finance I: FINA 385

Portfolio Project, Part 1:

Choosing stocks and setting up
the model
The objective of the group project is to give you an opportunity to apply the portfolio theory we
will cover in class and to enhance your understanding of concepts. The project must be done in
groups of 3. Individual submissions will receive a grade of zero. Other group sizes are only
allowed in exceptional circumstances by express prior permission of the instructor.
In this first part of the portfolio project you are asked to choose 10 to 15 stocks that you think will
perform well over the next three months and to create an input list that you will use in the
second part of the project.
Task A: Choosing stocks
1. You are allowed to invest in any stock you can find on http://finance.yahoo.com/. A good
place to start your search would be the following section of Yahoo! Finance:
http://biz.yahoo.com/r/ – click on sector / industry analysis (under analyst research);
click on the sector of your choice; this will reveal a list of industries in the sector; by
clicking on an industry you will get a list of all firms in that industry;
2. Choose between 10 and 15 stocks that you think will perform well between May 22 and
June 15;
3. Choose the weights of each stock in your portfolio;
4. Fill out the first four columns in the report on the portfolio performance (see the sample
on page 3 of this document). Column 4: “Closing price on the report period beginning
date” should be the same for all stocks: either May 20, 21, or 22 (choose one date for
all stocks and indicate it clearly). Leave the remaining columns blank for now. You will
need them in the Part 2 of the project.
5. Choose one reliable group member to post the Excel file in the “Project: Part 1, Task A”
folder of the class Moodle account by 11 am on Friday, May 23. Only one submission
per group!
6. Task A is ungraded, but if not submitted on time and in a proper Excel format, it will result
in a 20 points penalty on the total grade for the project – and you will still need to submit
it to do Part 2, Task D.

Task B: Setting up the Excel Spreadsheet Model (20 points)

7. Using monthly stock returns over the last five years (60 months), calculate expected
returns, variances, standard deviations, and covariances for stocks in your portfolio.
(Historical prices can be found under the Quotes section after you have searched the
Yahoo! Finance by the ticker symbol of the stock you have picked).
8. Using the example at the end of this document, set up an Excel spreadsheet model.
Follow the format of the example. All calculations should be done in Excel, as the
example suggests. Additional examples and explanations are available in the Appendix
7A of the textbook.
 9. What are the expected return, variance, and standard deviation of your portfolio?
Indicate it in the model, as the example suggests.
10. Use the same reliable group member to post your Excel spreadsheet in the “Project:
Part 1, Task B” folder of the class Moodle account by 11 am on Friday, May 23. I
suggest doing this task ASAP, even before you submit Task A.
Task B is worth 20 points out of the total of 120 points for the project.

IMPORTANT:
The four files that you are submitting MUST be named as follows (example):
Smith – Task A
Smith – Task B
Where instead of Smith indicate the last name of one of your group members – it should be the
same name for every Task for your group. I suggest picking the most responsible group
member.
Indicate full names and student numbers of ALL group members in the top left corner inside
every file submitted.
Only ONE submission per group, please!

Additional Instructions:
 Late assignments will result in the grade of zero.
 If I cannot open your file, you receive the automatic grade of zero.
 Assignments in ANY non-Excel formats will result in the automatic grade of zero.
 Your Excel file calculations should make use of Excel formulas to calculate all results (no
simple posting of numerical values from other documents!). If I cannot clearly see how
you obtained your results, or if I cannot replicate your results, you will receive a grade of
zero.
 Clarity!!! Your answers should be very clear, self-explanatory, explicitly labelled (no non-
standard abbreviations!) and easily interpreted in Excel. If I cannot easily
understand/verify where the answers are coming from, this will also result in a zero
grade for that question. No additional in-person explanations will be accepted.
 Format of the Report on the portfolio
performance
(Tasks A and D), in Excel
Group members:
1. First name: Last name: Student #
.

2. First name: Last name: Student #

.

3. First name: Last name: Student #

.

Closing Closin
price on g price
the Dividends on the
report over the report
Compan Ticke period report period
y r Weight beginnin period end date HPR Weighted HPR
g
name symbo
date
l
AT&T T 0.10 12.32 0.04 11.56 -0.058442 -0.0058442

sum -0.0058442
 Task B: Excel Spreadsheet Model example
Group members:
1. First name: Last name: Student #
.

2. First name: Last name: Student #

.

3. First name: Last name: Student #

.

A B C D E F
1 RBC ZEB Visa Inc. Wells Fargo
2 -0.0610 -0.0656 0.0250 0.0138
3 0.0415 0.0162 0.0714 0.0237
4 -0.0105 0.0033 0.1343 0.0241
…
60 0.1052 0.0798 0.0363 -0.0441
61 -0.0962 -0.0813 -0.0678 0.0522
62 Expected =AVERAGE(C2:C61) =AVERAGE(D2:D61) =AVERAGE(E2:E61) =AVERAGE(F2:F6
return 1)
63
64 variance covariance matrix
65 RBC =VAR.S(C2:C61) =C66 =C67 =C68
66 ZEB =COVARIANCE.S(C2:C61,D2:D =VAR.S(D2:D61) =D67 =D68
61)
67 Visa Inc. =COVARIANCE.S(C2:C61,E2:E =COVARIANCE.S(D2:D61,E2 =VAR.S(E2:E61) =E68
61) :E61)
68 Wells Fargo =COVARIANCE.S(C2:C61,F2:F =COVARIANCE.S(D2:D61,F2: =COVARIANCE.S(E2:E61,F2: =VAR.S(F2:F61)
61) F61) F61)
69
70 bordered variance covariance matrix
71 =B72 =B73 =B74 =B75
72 RBC 0.1 =B72*$C$71*C65 =B72*$D$71*D65 =B72*$E$71*E65 =B72*$F$71*F65
73 ZEB 0.1 =B73*$C$71*C66 =B73*$D$71*D66 =B73*$E$71*E66 =B73*$F$71*F66
74 Visa Inc. 0.1 =B74*$C$71*C67 =B74*$D$71*D67 =B74*$E$71*E67 =B74*$F$71*F67
75 Wells Fargo 0.1 =B75*$C$71*C68 =B75*$D$71*D68 =B75*$E$71*E68 =B75*$F$71*F68
76 =SUM(B72:
B75)
77
78 variance =SUM(C72:F
75)
79 stdev =SQRT(B78)
80 exp return =B72*C62+D62*B73+B74*E62+B75*F62