Project: Portfolio Analysis with two assets
Prof. P.V. Viswanath

Get stock price data from http://chart.yahoo.com/d/ for the period from August 1994 to August1999 for IPSCO Inc. (ticker symbol IPS), Atchison Casting (FDY) and Gibraltar Steel (ROCK) in a spreadsheet format. Use the last column of the data (titled Adj. Close) to compute monthly returns. Then compute the expected returns and standard deviations of returns for different portfolio proportions of IPS and FDY, then FDY and ROCK; and then ROCK and IPS. Also compute the portfolio proportions of the absolute minimum variance portfolio for each of the three pairs of stocks. Next, plot on a single graph, the (E(R), s) combinations for all three pairs of assets. Show the minimum variance portfolios on your graph. Divide your work into four parts:

• Return data (in a different worksheet)
• Computation of the Minimum Variance Portfolio Proportions
• Computation of the Combination Lines
• Graph of the Combination Lines

Assign names for each of these parts, so that it is possible to go to each part by clicking on the appropriate name in the Name Bar. (Click here for more information.)

Answer the following questions:

1. If you had not yet computed the portfolio variances for different portfolio combinations, and you wanted to minimize portfolio variance to the greatest extent, which of the three pairs of stocks would you choose? Why? Note: I am looking for an answer that relates to the characteristics of the assets. An answer that chooses one of the two pairs because its minimum portfolio variance is lower is insufficient.
2. Can you decrease the standard deviation of returns of a portfolio consisting of two stocks below the standard deviations of returns of either stock by itself? If so, how? Can you increase portfolio standard deviation of return above the standard deviations of returns of either stock by itself? If so, how?

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