Project 1: Optimal Risky Portfolio and Diversification

Project 1: Optimal Risky Portfolio and Diversification

Summary: The project asks student to pick 5 corporations and use daily returns in August 2017 to form expectations on average returns and covariances for September. Based on the expectations, an optimal risky portfolio is constructed to be held through the September. Then use the actual returns in September to calculate the actual Sharpe of the portfolio and study whey the actual one is different from the expected Sharpe.

How will the ten credits be earned:

(1) Pick 5 public corporations listed in the U.S. and collect their daily returns in August and September 2017 (1 credit).

(2) With data from (1) and in Excel, use the ‘average’ function to calculate the average daily returns (1 credit) in August and use the ‘covariance’ function to calculate the covariance matrix in August for the 5 corporations you picked (1 credit)

(3) Assuming that the risk free rate is zero and that the average returns and covariance matrix from (2) are expected ones for September, using the ‘solver’ function in Excel to calculate the weights on the 5 corporations that construct the optimal risky portfolio with the 5 corporations (1 credit). Also calculate the expected Sharpe Ratio of that optimal risky portfolio (1 credit).

(4) Suppose that you have constructed the best risky portfolio as in (3) and will hold it through September, use the actual daily returns in September to calculate the portfolio’s actual average daily return (1 credit), standard deviation (1 credit) and Sharpe Ratio (1 credit).

(5) Analyze why the actual Sharpe Ratio from (4) is higher or lower than the expected one from (3) (2 credits).


(1) In the project, the 5 corporations should be specified.

(2) Show how each answer is achieved so that I can replicate it.

(3) Raw data should be attached.


(1) Functions in Excel can be easily learned on Google or

(2) Daily price or return data can be obtained from Yahoo Finance or

(3) To examine why the actual Sharpe is different from the expected one, two checks are helpful: the actual average returns in September may be different from those in August; the variances and covariances of the 5 stocks may be different between August and September. You need to specify why those differences lead to a higher or lower Sharpe than the expected one.

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