Finance with Dr. John Elder
LE#6

Chapt 5 #  1, 3, 4, 19, 20, 21, 24.  

Be sure to work through the examples in the text and the notes before attempting this assignment!

OTIS:  (I will show you how to do this part in class!) Go to http://www.morningstar.com, click on "tools" then click on "instant x-ray".  Enter the data (tickers and shares) for the portfolio you currently hold in OTIS, and then click on "instant x-ray".  This is an excellent tool for evaluating a portfolio, and gives you some insight on the tools used by professional money managers in managing portfolios.  Cut and paste your X-Ray into your OTIS journal under LE6 (it won't format perfectly, but should be OK).

OTIS journal entry:  In a couple of paragraphs, answer the following questions:
Is your portfolio diversified by "style" (via the "style box"),  "stock sector" or "stock type"?
How do the "stock stats" on your OTIS portfolio compare to the S&P 500?
Are you surprised by anything this analysis revealed?  (e.g., did you discover that you have inadvertently made large sector  or style bets?
If you were constructing a portfolio as a long-term investment, how would modify your existing holdings?
1.  Recall that geometric averages aggregate over time...
3.  Try this on your own.
4.  Verify the expected return is 14% and the std deviation is 23.24%
19a. Fill in the formulas for expected return and std deviation of a portfolio in the spreadsheet template here.  The formulas are given in class, in the text and in the spreadsheet.  Verify for the portfolio described in this problem that E(rp)=14% and SD(rp)=18.9%.  Save this spreadsheet file.  You will use it again in a later assignment.
19b. If you your client has 70% in your fund, and your fund has 27% in stock A, then your client and 0.7*0.27=18.9% in stock A. Continue on your own.
19c. Verify that the reward to variability ratio is 0.3704 for both.
19d.  Plot the CAL in your Excel spreadsheet by using the "scatterplot" chart.  Be sure the vertical axis has E(rp) and the horizontal axis has SD(rp).
You can swith the horizontal and vertical axis (in Excel 07) by right-clicking the scatter plot, selecting "select data" and then "edit".  Then just reverse the "x" and "y" axes.
20.  Using the expression E(rp) = yE(ri) + (1-y)E(rj), verify that if the target expected return on the portfolio is 15%, there must be 80% allocated to your fund.
21.  Using the expression for the std dev of a portfolio, verify that if the target portfolio has a std dev of 20%, there must be 74% allocated to your fund.
24.  try on your own.