Expected monthly return, Financial Management

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In this exercise you will construct efficient portfolios with 5 risky assets using Excel's non-linear optimization routing "Solver". The questions are designed to be sequential and to lead up to the desired result. It is crucial to notice that you will be using past returns to estimate expected returns and risk. From Sakai download the file  data_question1.xlsx which contains monthly returns for AT&T, Ford, Google, Exxon Mobile, and Gold from 2005-2012. The monthly returns have been adjusted to reflect dividend payments and are provided in decimal form to make the necessary calculations easier.

a)  Using the monthly returns provided what is the expected monthly return for each asset and what is the corresponding standard deviation? In order to calculate the mean use the Excel function "AVERAGE"; in order to calculate the standard deviation use the Excel function "STDEV.S".

b)  We discussed in class that when we are analyzing the returns on a portfolio of assets, the covariance or correlations of each asset with the other ones will be crucial in determining the portfolio risk. Using the given monthly returns tabulate the pairwise covariances for each asset pair and tabulate the correlations for each asset pair. Use the Excel functions "COVARIANCE.S" and "CORREL".


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