Stock Case
Stock Case: Dow 30 Case
How do you create a diversified stock portfolio?
Introduction
Our goal was to create an optimal diversified portfolio consisting of the Dow Jones Index. We used the modern portfolio theory which maximizes expected portfolio return for the amount of risk taken by taking the stock weights in to consideration. Our group consisted of risk averse investors; therefore we diversified our portfolio with all 30 Dow Jones stocks because we wanted to achieve an acceptable return with a limited amount of risk. We implemented Excel’s Solver to figure out the stock weights in our optimal portfolio and then by tracking the portfolios performance over time. Implementing Excel’s Solver included making covariance matrices, analyzing historical returns of other indices including S&P 500, and setting constraints for the solver. At this stage we were ready to implement our trading strategy in to Real Time FTS Client. The portfolio was monitored every other day.
Risk and Return Mid-way through our investment process, we had to decide on what to base the Excel Solver on, whether it be maximizing return or minimizing risk. After having decided upon maximizing the expected return of our portfolio we had to figure out a way of estimating this. There are several ways on figuring this out such as using Treasury bonds, Dividend Discount Model, historical return on index, or even picking a reasonable random number. We decided to base our expected return on past returns of both the Dow Jones Industrial Index (9.58%) and the S&P 500 index (9.53%). We looked at the past 36 year average returns for both indices to come up with a 9.56% expected return. Using Excel, we also found the standard deviation or risk which was 26.56%. After this we were able to use Solver to figure out the appropriate weights for each stock in the Dow Jones Index (Appendix A). At the moment, we expected the level of risk to be high since we got the return using the Dow Jones Index
How do you create a diversified stock portfolio?
Introduction
Our goal was to create an optimal diversified portfolio consisting of the Dow Jones Index. We used the modern portfolio theory which maximizes expected portfolio return for the amount of risk taken by taking the stock weights in to consideration. Our group consisted of risk averse investors; therefore we diversified our portfolio with all 30 Dow Jones stocks because we wanted to achieve an acceptable return with a limited amount of risk. We implemented Excel’s Solver to figure out the stock weights in our optimal portfolio and then by tracking the portfolios performance over time. Implementing Excel’s Solver included making covariance matrices, analyzing historical returns of other indices including S&P 500, and setting constraints for the solver. At this stage we were ready to implement our trading strategy in to Real Time FTS Client. The portfolio was monitored every other day.
Risk and Return Mid-way through our investment process, we had to decide on what to base the Excel Solver on, whether it be maximizing return or minimizing risk. After having decided upon maximizing the expected return of our portfolio we had to figure out a way of estimating this. There are several ways on figuring this out such as using Treasury bonds, Dividend Discount Model, historical return on index, or even picking a reasonable random number. We decided to base our expected return on past returns of both the Dow Jones Industrial Index (9.58%) and the S&P 500 index (9.53%). We looked at the past 36 year average returns for both indices to come up with a 9.56% expected return. Using Excel, we also found the standard deviation or risk which was 26.56%. After this we were able to use Solver to figure out the appropriate weights for each stock in the Dow Jones Index (Appendix A). At the moment, we expected the level of risk to be high since we got the return using the Dow Jones Index