1. Choose two stocks whose ticker starts with the first letter of your first name (example: “B”lake, BA, BYND, and B). Each company should be trading for at least two years.
2. Download two years’ worth of daily stock price data from yahoo finance or any other site you would like to use. Keep the adjusted close, and compute log returns.
Helpful Hints:
Yahoo finance is the easiest way to download historical stock price data. https://finance.yahoo.com/.
Yahoo is easy but can take some time. If you are interested in getting stock data into excel and you like exploring new things, try alpha vantage https://www.alphavantage.co/excel_installer/.
You could also use NASDAQ’s site, https://www.nasdaq.com/market-activity/quotes/historical.
Compute the average annual return, the average annual standard deviation.
3. Using excel, compute the correlation matrix between all stocks. (Hint: Make sure to watch the lecture)
4. Using the stocks, compute the unconstrained optimal-risky portfolio (maximize Sharpe-ratio; for definition, check here: https://corporatefinanceinstitute.com/resources/knowledge/finance/capital-allocation-line-cal-and-optimal-portfolio/.
5. Using the same data, but in a new tab, compute the optimal risky portfolio with the constraint of no shorting (weights > 0).
6. Lastly, answer the following questions:
A. Using laymen terms, what is the optimal-risky portfolio, and why would an investor want to invest according to its recommendations?
B. The problems above have been exact math problems (meaning they gave a precise answer, which under stable conditions, would yield the best return possible). Name at least one issue with the efficient frontier that may lead to “over-promising.” Research, name, and explain, the logic of at least one model that has tried to fix the issue you identified.
Submit your answers and work in two files. One excel file for your work, and one word file for the final solutions. Any submission that does not consist of calculations may receive no credit.
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