Economics Homework Help

To develop an understanding of modern portfolio theory, you will begin by analyzing a portfolio of two securities. In your Modern Portfolio Theory Report, describe the two stocks you chose to invest in (FACEBOOK and APPLE)

Include the following in your report:

• Create a table and list the two stocks you chose to purchase for the Stock-Trak investment.
• Identify the name, ticker symbol, price per share, and total amount of trade.
• Explain your choice of these two securities as either highly correlated or negatively correlated.
• Calculate the weight of each security based on the market values of this two-security
• Calculate the geometric mean return for each stock based on the last five years.
  • Note: Not all stocks will have data over this time period. Use a reasonable time period that is equivalent for both stocks.
• Calculate the standard deviation of each stock, using data from Stock-Trak. To do this
  • On Stock-Trak, for each stock go to Share Price Performance.
  • Look up the standard deviation as reported by Stock-Trak. This is the monthly standard deviation.
  • To determine the annualized standard deviation, multiply the monthly standard by the square root of 12.
  • Annual Std. Dev. = (SQRT 12) * Std Dev.
• Calculate the covariance of these two securities using equation 7-9 in the textbook.
  • Calculate annual returns for each security for the past five years.
  • Use your calculated geometric mean return as the expected return.
  • Assume an equal probability for each return.
• Calculate the correlation coefficient between these two stocks using equation 7-10 in the textbook.
  • Use your calculated covariance.
  • Use the annualized standard deviations you derived from Stock-Trak for each security.
• Calculate the risk of the portfolio.
  • Use equation 7-12 in the textbook.
  • Use your calculated correlation coefficient.
  • Use the annualized standard deviation you calculated for each.
• Calculate the expected return of this two-security portfolio.
  • Use your calculated geometric mean return as the expected return for each security.
• Summarize your calculations in a table.
• Explain the meaning of the correlation coefficient you calculated and determine if the value meets your expectation for these two stocks as either highly correlated or negatively correlated.
• Compare the portfolio expected return and risk to the expected return and risk for each security alone.
• Calculate the portfolio risk and the portfolio expected return for five portfolios using these two securities and the following weights on each security:
  • Security A: 10%, Security B: 90%
  • Security A: 25%, Security B: 75%
  • Security A: 50%, Security B: 50%
  • Security A: 75%, Security B: 25%
  • Security A: 90%, Security B: 10%
  • Use your calculated correlation coefficient.
• Create a table illustrating the impact of changing weights of these two securities on the portfolio risk and expected returns.
• Explain the benefit of diversifying this portfolio from a portfolio of one of these stocks into the portfolio of two stocks.

The Modern Portfolio Theory Report paper

• Must be no less than three to five single-spaced pages in length including data tables (not including references pages).
• Must include an introduction and conclusion paragraph.
• Must be written for a professional setting.
• Must have all in-text citations formatted according to APA standards
• Must use at least three credible sources.