Assignment Portfolio Optimisation

Question 1

C) If I could choose to allocate between risk free asset and either Citigroup or Google, I will choose Google. As Google has higher returns for lower risk.

E) Sketch the minimum variance frontier for C and GOOG

Question 2

A)

B) I will allocate my capital with the following weights

OPTIMAL

PORTFOLIO

Riskless
33.06%

XOM
-61.38%

GE
-6.52%

PFE
60.99%

WMT
25%

GOOG
48.86%

Question 5
The answers are as follows:
A) ii, 7%
B) iii, 2.0
C) ii, false
D) i, true
E) iii, +1
F) iii, a positive weight in the risk free asset and a negative weight in the market
G) i, more idiosyncratic risk than market portfolio

Question 6

A) The return data of the four funds is given below. It is clear that DFA has the best risk adjusted returns as captured by the Sharpe ratio. It has the disproportionately high returns for the risk taken.

So, in order of performance, the funds are enlisted below:

1) DFA
2) Diversified
3) T. Rowe Price
4) Goldman

B)
Using CAPM
I gave regressed excess stock return with excess market returns to isolate Alpha.

R (Goldman)= 1.167 (Rm – Rf) - .00705
Significance: R2 Value is .87, X variable T stat is 19.8, Alpha T-stat is -2.4; Residuals of X variable are randon, thereby significant X Variable and Alpha values. 95% probability band for Alpha is -1.2% to -.12%

R (DFA) = .975 (Rm-Rf) + .01379
Significance: R2 Value is .68, X variable T stat is 11, Alpha T-stat is 3.2; Residuals of X variable are randon, thereby regression has significant results); 95% probability band of ALPHA is from .05% to 2.2%)

R (Diversified) = 1.09(Rm-Rf) +.0062
Significance: R2 Value is .69, X variable T stat is 11, Alpha T-stat is 1.3; Residuals of X variable are randon, thereby regression has significant results); The Alpha value t-stat is