Using the data given below and assuming an equal dollar investment in each stock, calculate the expected return and standard deviation of each portfolio.
Daniel is in the process of analyzing Mihaela’s portfolio. Ms. Mihaela owns a substantial number of shares of the common stocks of Exxon, General Mills, Minnesota, Mining, and Manufacturing (3M), and Sears, Roebuck & Company, and she wants him to manage her portfolio. Dan tries to convince Mihaela of the benefits of adding additional securities including fixed income to her portfolio. Based on the information given below on four securities in Mihaela’s portfolio, answer the following questions:
1. Why did Dan try to convince Mihaela of the need to add securities to her portfolio four stocks? Explain clearly
2. Assuming an equal dollar investment in each stock, how many different combinations of portfolios can Mihaela form with the four stocks? Without equal dollar investment in each stock, how many portfolios can be formed? Why?
3. Using the data given below and assuming an equal dollar investment in each stock, calculate the expected return and standard deviation of each portfolio.
4. Using return and risk statistics from part 3, plot them and determine the efficient frontier. Identify the portfolios on efficient frontier.
5. What are the shortcomings of the approach suggested in questions 3 and 4 above? Does it really help you identify efficient portfolios?