Question

Let's use Excel to explore the benefits of diversification. Download weekly adjusted closing price data for AutoZone (AZO), Lockheed Martin (LMT), FedEx (FDX), Harley Davidson (HOG) and McDonald's (MCD) between 3 January 2012 and 31 Dec 2012. Use the weekly prices to compute weekly returns and then compute the covariance matrix of returns using the Excel function COVARIANCE.S (you can compute variances with COVARIANCE.S or with VARIANCE.S).

Suppose you form an equally-weighted portfolio of HOG and FDX. What is the portfolio variance?

Answer 1