Calculating Expected Returns, Risk and Correlations of Financial Assets

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SKU: Fin892235 Category:

Calculate the correlation between both markets since 2005

 

1.Calculate the historical annual returns of two country’s equity markets of your choice from 2005-2014. Create a separate graph for each market and show the historical annual returns against the expected return of each market. Comment on your findings. Using the rule of 70 how long would it take to double your investment in each of the markets?

 

2.Calculate the standard deviation of the historical annual returns and coefficient of variation for both markets. Based on the historical performance of both data which market gives the better risk-return tradeoff?

 

3.Calculate the correlation between both markets since 2005 – would an investor who has invested in both markets benefit from diversification?

 

4.Calculate the annual correlation between both markets for every year since 2005 and place it on a time series graph – does this support your answer to Question 3.

 

5.Calculate the 60 day rolling correlation between both markets for every year since 2005 and place it on a time series graph – does this support your answer to Question 4.

 

6.Using 10 different weighting options for your 2 asset portfolio, calculate your annual returns, expected return and portfolio risk for each weighting option. What is the optimal weighting combination for your 2 assets (which weighting combination minimises your CV? –Remember, when building a diversified portfolio, the level of correlation between the elements of your portfolio can impact on the risk/return dynamic.  The closer your correlations are to negative 1, the more risk can be diversified away.

 

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