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Statistical and Financial Evaluation Portfolio Formation Analysis

Statistical and Financial Evaluation Portfolio Formation Analysis


This is a complete written report of your portfolio formation in a Word document. Your historical data and relevant derived values in tables can be pasted from your previous calculations in the Excel spreadsheet. Please provide explanations of all calculations and the justifications in Word format. Make sure to also paste all underlying Excel formulae that you used for calculations in the Word document.

Once again, provide the data that you presented in answering Part 2 of Professional Assignment 2.

Calculate the mean, variance, and the standard deviation of each security’s annual rate of return.

Calculate the correlation coefficient between every possible pair of securities’ annual rates of return.

  1. Choose percentages of your initial investment that you want to allocate amongst the five (5) securities (weights in the portfolio). 
  2. Create embedded formulae which generate statistical properties of the portfolio upon insertion of the weights. 
  3. Observe the mean, the standard deviation, and the CV of the annual rate of return of the portfolio.
  4. Find the combination of the weights that minimizes CV of the portfolio. 

How does the CV of the optimal portfolio compare with the CVs of its constituents? 

  1. What is the expected rate of return and standard deviation of the rate of return of the portfolio?
  2. Choose different values within the range of the standard deviation of the portfolio, and for each chosen value, locate the corresponding point on the efficient frontier by finding the weights that maximize the expected rate of return of the portfolio. 
  3. Subsequently, construct the efficient frontier of your portfolio.    

Assume that you initially invested $1,000,000 in the portfolio and that the distribution of the annual rate of return of the portfolio is normal. 

  1. What is the distribution of the return of the portfolio 20 years after its formation? 
  2. Provide the graph of the distribution of the return of the portfolio. 
  3. Provide your explanations and definitions in detail and be precise. Comment on your findings. Provide references for content when necessary.  

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