Project 1 Portfolio Construction and the Capm

Project 1 Portfolio Construction and the CAPM

Prepared by Lin Miao

(1123015)

Content

Part 1. Introduction        3

a.        Market portfolio        4

b．Stocks        4

c． Risk- free rate        5

Part 2: Portfolio Selection        5

a. The standard deviation and average realized return of each of the three stocks and the market index as well as the equally weighted portfolio.        5

b. Compare and contrast the mean and standard deviations of these five possible investments, noting the key differences.        6

c. The correlation between each of the three stocks and between the market index and the equally weighted portfolio.        6

Part 3: Visualize the data 3.        7

a.        The graphs that shows the realized returns and standard deviations of all possible combinations of the three stocks. Additionally, the red point of each graph shows each highest sharpe ratio. (stock 1: stock code 000006, stock 2: stock code 000159, stock 3: stock code 000585)        7

b.        It is shown on the above graph, this tangency portfolio is the one which has the highest sharpe ratio. As a result, the return and standard deviation are as below        9

Part 4: CAPM model        10

a. Explain what would be the diversification benefits from adding a risk-free asset.        10

b. Which portfolio should be used as a market portfolio? Please use your results from earlier parts to answer this question.        10

c. the beta and CAPM model for each of the three stocks        11

Part 5: Discussion        11

a.        In what way are the results consistent with what you have learned in this course?        11

b.        In what way are the results inconsistent with what you have learned in this course? In your opinion, does the CAPM hold?        12