question archive Mr Morris had $100,000 in his account
Mr Morris had $100,000 in his account
Subject:FinancePrice:4.89 Bought8
Mr Morris had $100,000 in his account. Using this fund, he made a portfolio of two NYSE listed stocks – Johnson and Johnson (J&J) and IBM on 01 Jan 2019 in the ratio of 60:40, i.e. 60% funds in J&J & 40% funds in IBM.
The daily stock data of both stocks can be found on market websites such as finance.yahoo.com. Download daily data for 1 year from 1 Jan 2019 – 1st Jan 2020.
Using the stock data of the two stocks, you are required to explain the below concepts and then compute for the given stocks:
a. Annual return of both J&J and IBM. (10 marks)
b. Annualized standard deviation of returns of both J&J and IBM (10 marks)
c. Correlation coefficient of returns of J&J and IBM. What does this correlation coefficient signify about the correlation of the two stocks and
corresponding decision from an investor? (10 marks)
d. Portfolio return of the portfolio of two stocks. (10 marks)
e. Portfolio risk (standard deviation) of the portfolio of two stocks. (10 marks)
f. Critically analyze your investment decision in these two companies (10 Marks). Given an option, would you like to invest in any other
company? Or would you like to have a different ratio of investment in the two? (10 marks)
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Annual return of IBM is 17.32% and J&J is 14.68%
Daily return is calculated by (Today's closing price - Previous day's closing price/Previous Day's closing Price)
for eg - price on 01/02/2019 is 100 and 01/03/2019 is 120 then (120-100)/100.
Take the average (using Average function in excel) of the returns of the stock and multiply by the number of trading days in a year which in this case is 252 for the time period 01/01/2019 - 01/01/2020. This gives the annual return.
Standard Deviation of IBM is 20.61% and J&J is 16.43%.
Calculate annualized standard deviation by calculating the variance using VARP function in excel and multiply by 252 which is number of trading days to give annualized variance. Take the square root of the annualized variance to get the annualized standard variation using function SQRT.
Correlation coefficient of IBM and J&J is 0.2456 which shows that the stocks are slightly correlated that is movement in price of one stock affects the other.
Portfolio Return is calculated as - weight of IBM in portfolio * stock return of IBM + weight of J&J in portfolio * stock return of J&J = 17.32*0.4 + 14.68 * 0.6 = 15.736
Portfolio std dev is calculated as - weight of IBM in portfolio * std dev - IBM + weight of J&J in portfolio * std dev - J&J = 20.61*0.4 + 16.43 * 0.6 = 18.102
