Today is April 30, 2012, and you have just started your new job with a
financial planning firm. In addition to studying for all your license exams,
you have been asked to review a portion of a client’s stock portfolio to
determine the risk/return profiles of 12 stocks in the portfolio.
Unfortunately, your small firm cannot afford the expensive databases that would
provide all this information with a few simple keystrokes, but that’s why they
hired you. Specifically, you have been asked to determine the monthly average
returns and standard deviations for the 12 stocks for the past five years. In
the following chapters, you will be asked to do more extensive analyses on
these same stocks.
The stocks (with their symbols in
Archer Daniels Midland (ADM)
Deere & Co. (DE)
General Mills, Inc (GIS)
Google Inc. (GOOG)
International Business Machines Corp. (IBM)
JPMorgan Chase & Co. (JPM)
Procter and Gamble (PG)
1. Collect price information for
each stock from Yahoo! Finance (http://finance.yahoo.com) as follows:
Enter the stock symbol. On the page
for that stock, click “Historical Prices” on the left side of the page.
Enter the “start date” as April 30,
2003 and the “end date” as April, 2008 to cover the five-year period. Make sure
you click “monthly” next to the date.
After hitting “Get Prices,” scroll to
the bottom of the first page and click “Download to Spreadsheet.” If you are
asked if you want to open or save the file, click open.
Copy the entire spreadsheet, open
Excel, and paste the Web data into a spreadsheet. Delete all the columns except
the date and the adjusted close (the first and last columns).
Keep the Excel file open and go back
to the Yahoo! Finance Web page and hit the back button. If you are asked if you
want to save the data, click no.
When you return to the prices page,
enter the next stock symbol and hit “Get Prices” again. Do not change the dates
or frequency, but make sure you have the same dates for all the stocks you will
download. Again, click “Download to Spreadsheet” and then open the file. Copy
the last column, “Adj. Close,” paste it into the Excel file and change “Adj.
Close” to the stock symbol. Make sure that the first and last prices are in the
same rows as the first stock.
Repeat these steps for the remaining
4 stocks, pasting each closing price right next to the other stocks, again
making sure that the correct prices on the correct dates all appear on the same
2. Convert these prices to monthly
returns as the percentage change in the monthly prices. (Hint: Create a
separate worksheet within the Excel file.) Note that to compute a return for
each month, you need a beginning and ending price, so you will not be able to
compute the return for the first month.
3. Compute the mean monthly returns
and standard deviations for the monthly returns of each of the stocks.15
Convert the monthly statistics to annual statistics for easier interpretation
(multiply the mean monthly return by 12, and multiply the monthly standard
4. Add a column in your Excel
worksheet with the average return across stocks for each month. This is the
monthly return to an equally weighted portfolio of these 12 stocks. Compute the
mean and standard deviation of monthly returns for the equally weighted
portfolio. Double check that the average return on this equally weighted
portfolio is equal to the average return of all of the individual stocks.
Convert these monthly statistics to annual statistics (as described in Step 3)
5. Using the annual statistics,
create an Excel plot with standard deviation (volatility) on the x-axis and
average return on the y-axis as follows:
a. Create three columns on your
spreadsheet with the statistics you created in Questions 3 and 4 for each of
the individual stocks and the equally weighted portfolio. The first column will
have the ticker, the second will have annual standard deviation, and the third
will have the annual mean return.
b. Highlight the data in the last two
columns (standard deviation and mean), choose>Insert>Chart>XY Scatter
Plot. Complete the chart wizard to finish the plot.
6. What do you notice about the
volatilities of the individual stocks, compared to the volatility of the equally