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Project I: Finance Application

Project I: Finance Application. The project is divided into three partsCalculate mean, standard deviation

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Project I: Finance Application

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    1. Project I: Finance Application

    2. Project I: Finance Application

    3. Part 1. Finding Beta (18.6 in text) One of the most important applications of linear regression is the market model. It is assumed that rate of return on a stock (R) is linearly related to the rate of return on the overall market. R = b0 + b1Rm +e

    4. Estimate the market model for Nortel, a stock traded in the Toronto Stock Exchange. Data consisted of monthly percentage return for Nortel and monthly percentage return for all the stocks.

    5. Part 2. Diversification (Sect 7.5, Ex 7.8) Investment portfolio diversification An investor has decided to invest 60% of investable resources in Investment 1 (bond fund—conservative investment) and 40% in Investment 2 (stock fund, riskier but higher returns on average). Find the expected return on the portfolio If r = 0, find the standard deviation of the portfolio.

    6. The return on the portfolio can be represented by Rp = w1R1 + w2R2 = .6(.15) + .4(.27) = .198 = 19.8%

    7. Part 2. Diversification (cont’d) Investment portfolio diversification Now assume your investor wants to see what kind of returns and risk she might assume is she invested 20% of investable resources in investment 1 (bond fund—conservative investment) and 80% in investment 2 (stock fund, riskier but higher returns on average). Find the expected return on the portfolio If r = 0, find the standard deviation of the portfolio.

    9. Part 2. Diversification (cont’d) Investment portfolio diversification Maintaining this last assumption (she invested 20% in Investment 1, and 80% in investment 2), but the correlation coefficient between bonds and stocks is now 1, not 0. Find the expected return on the portfolio Find the standard deviation of the portfolio.

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