Portafolios de Inversión

Antonio Silva Murillo

November, 2024

Instructions

When uploading the assignment:

1) Save the file with the name of the first surname of each member of the team (ordered
alphabetically) separated by an underscore and finish with the letter “A” in caps,
separated by an underscore and the # of the assignment.
i.e. Aguilar_Diaz_Rodriguez_A2

2) On the cover page add names and student id of each member of the team.

3) Upload the pdf and the excel spreadsheet.

4) Keep an order and mark your answers.

5) Write-down all the steps that you took to calculate an answer when it is the case. The
lack of all the process will be penalised with a lower mark.

6) Answer what it is asked, be as concise as possible.

7) If you are not sure how to make an intermidiate step make an assumption about a
certain value and proceed with the rest of the exercise.

Not following the instructions will result in a lower mark.

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Part I: Theory

1) The mean is a measure of location or central tendency whilst the standard deviation is a
measure of dispersion.
2) If prices deviate from equilibrium how will equilibrium be restored under the CAPM?
• Prices are off, buyers and sellers step in to adjust them. Overpriced stuff gets
sold, driving prices down, and underpriced stuff gets snapped up, pushing
prices back up.
3) What is the covariance?
• Figuring out if two things (like stocks) move in the same direction or not.
4) Define: Expected Return.
• Best guess for how much money you’ll make, based on different outcomes and
their chances of happening.
5) What is the value of the entire area under the curve on a Probability Density Curve?
• Is always 1—because it’s showing all possible outcomes, and they have to add
up.
6) If an investor wants to buy a security which price is more likely that it will have to
pay to get the order filled? Bid or Ask?
• If you want to buy a stock, you’ll probably pay the Ask price—it’s what sellers
are asking for.
7) Define: Risk Premium.
• Is the bonus return you expect for taking on extra risk instead of playing it safe
with something like a government bond.
8) According to history what are acceptable values for Risk Premium for stocks? (Give a
range).

• Is usually somewhere between 6% and 8%.

9) Define systematic risk and provide an example.
• Is the kind of risk you can’t avoid no matter how much you diversify. Think of
stuff like economic crashes.
• The 2008 financial crisis
10) What is the CAL?

• Shows you the trade-off between risk and return when you mix a safe asset
(like a T-bill) with risky ones (like stocks).
11) TRUE or FALSE: Under the mean-variance analysis the optimal risky portfolio of a risk-
averse investor will be less aggressive than the optimal risky portfolio of an aggressive
investor. Explain your answer.

• TRUE
12) Under the CAPM framework. Define the Market Portfolio (M).
• Is the ultimate of everything portfolio. It’s got every risky investment out there,
perfectly balanced by market value.
13) Why it is very unlikely that we will find security with a negative Beta and a positive
Risk Premium?
• A stock with a negative beta moves opposite to the market, like gold often
does. Asking for a positive risk premium on that kind of asset doesn’t make
sense because it reduces risk, not increases it.
14) What do the F measures in Factor Models?
• Sensitivity meters showing how much a stock reacts to big-picture stuff like
inflation or interest rates.
15) Define the concept of arbitrage under the APT framework
• Find a loophole in prices and make money without taking any risk. APT
assumes those loopholes don’t stick around.

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Part II:

Use the data in Table 1 for the questions 1 & 1.1: Assume the data follows a normal
distribution and you are getting a sample:

Table 1: Wilshire returns

Date wilshire
2 1991-01-01 0.3425814
3 1992-01-01 0.0898473
4 1993-01-01 0.1129431
5 1994-01-01 -0.0007407
6 1995-01-01 0.3639733
7 1996-01-01 0.2125000
8 1997-01-01 0.3128642
9 1998-01-01 0.2342096
10 1999-01-01 0.2356846
11 2000-01-01 -0.1090217
12 2001-01-01 -0.1097990
13 2002-01-01 -0.2085803
14 2003-01-01 0.3166904
15 2004-01-01 0.1245937
16 2005-01-01 0.0638247
17 2006-01-01 0.1577994
18 2007-01-01 0.0561205
19 2008-01-01 -0.3723385
20 2009-01-01 0.2828909
21 2010-01-01 0.1717636
22 2011-01-01 0.0098116
23 2012-01-01 0.1605130
24 2013-01-01 0.3305425
25 2014-01-01 0.1271080
26 2015-01-01 0.0066994
27 2016-01-01 0.1336513
28 2017-01-01 0.2099599
29 2018-01-01 -0.0526401
30 2019-01-01 0.3101741
31 2020-01-01 0.2081433
32 2021-01-01 0.2669722
33 2022-01-01 -0.1904154
34 2023-01-01 0.1765324

1) Calculate the z-score for the third value (the one marked with the #4 on the left).

µ = 0.12
If you do not know how to get the standard deviation and in order to avoid loosing all the
marks assume the following:
σ = 0.20
1.1)Interpret your results from the previous exercise.

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 Table 2: Variance-Covariance Matrix

jpm chevron wal_mart un_health wilshire

jpm 0.1035726 0.0129289 0.0381890 0.0597604 0.0408983
chevron 0.0129289 0.0400637 -0.0052860 -0.0040600 0.0091523
wal_mart 0.0381890 -0.0052860 0.0978148 0.0226057 0.0232450
un_health 0.0597604 -0.0040600 0.0226057 0.2057022 0.0192220
wilshire 0.0408983 0.0091523 0.0232450 0.0192220 0.0313008

Table 3: Weight in portfolio

jpm chevron wal_mart un_health

0.25 0.25 0.25 0.25

2) Find the Beta of the portfolio for the securities in Table 3, assume the wilshire is the
market index:

3) Consider both the next two are well-diversified portfolios. Under the APT what can
we infer about the relationship between both portfolios?

Port A: β = 1
Port B: β =
0.5

Security Market Line (SML)

Port
0.1

A
2
0.1
0
Expected

0.0
Return

8
0.0
6
0.0
4

0.0 0.5 1.0 1.5

Beta

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For questions 4 & 5 assume the following:

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 Table 4: Portfolio vs Market or Benchmark
Metric Portfolio Benchmark
table_returns Average Excess Return 0.1638 0.0948
table_std_dev Standard Deviation 0.2085 0.1769
table_alpha Alpha 0.09 N/A
table_beta Beta 0.74 1
table_sharpe_ratio Sharpe Ratio
table_treynor_ratio Treynor Ratio

rf = 2.57%
E(rM ) = 12.05%

4) Find the cost of equity (WACC) for the securities in Table 3:

5) Complete Table 4. (3 points)

-Find and interpret the Sharpe Ratio for the Portfolio & Benchmark.
-Find and interpret the Treynor Ratio for the Portfolio & Benchmark.
-Interpret the value of alpha for the Portfolio.
-Interpret the value of beta for the Portfolio & Benchmark.