Question

The following table contains the historic returns from large stocks and long-term Treasury bonds over the last 20 years. Analyze the risk-return trade-off that would have characterized these portfolios. Year Stoc 1997 31.33 24.27 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 24.89 -10.82 -11.00 -21.28 31.76 11.89 6.17 15.37 5.50 -36.92 29.15 17.80 1.01 16.07 35.18 11.37 11.312 13.094 -8.4734 14.4891 4-0302 14.6641 1.2778 5.1862 3.1030 2.2713 -6431 17.6664 5.8278 7.4457 16.6015 3.5862 -6.9025 10.1512 1.0665 0.7039 5.26 4.86 4.68 S.89 3-78 1.63 1.02 1.20 2.96 4.79 4.67 1.47 0.10 0.12 0.04 0.06 0.03 0.02 0.01 0.19 2010 2011 2012 2013 2014 2015 2016 -0.19 13.41 a. Calculate the average rate of return and standard deviation of the "Excess returns" after a continuous compounding transformation was performed. (Round your answers to 2 decimal places.) Weights in Stocks Bonds Portfolio Mean Standard deviation 0.0 0.1 0.9 0.2 0.8 0.3 0.7 0.4 0.5 0.5 0.6 0.4 0.7 0.3 0.8 0.2 0.9 0.1 0.6 1.0 d. What was the average return and standard deviation of the minimum-variance combination of stocks and bonds? (Round your answers to 2 decimal places.) Weights in Portfolio Stocks Bonds Mean Standard deviation Minimum-Variance 0.2277 0.7723

Answer 1

dSed(B)'Correl Sandard Deviation Covariance CoMS,B 3133 0.11315200 Stocks bovlstock return dara, bond return data) CodS BIMsdiBl'sd(S)] -0.003437773 0.606791404 10100.05754425 0.06042193 0063293611 0.076154659 1338 0.2427 0.13094.8600 1939 0.2489 -0.0847 4.6800 2000 0.1082 0.1449 2001 0.1100 0.04033.7800 2002 0.2128 0.1466 10300 2003 0.3176 0.0128 10200 2004 0.1189 0.0513 2005 0.0617 0.0310 2006 0.1537 0.0227 2007 00550 0.0964 2008 -0.3692 0.1767 2003 02915 0.0583 2010 0.1780 00745 0.1200 2011 0.0101 0.1660 2012 0.1607 0.0359 0.0600 2013 0.3513 -0.0690 2014 0.1137 0.1015 0.0200 2015 0.0013 0.0107 201 0.1341 00070 01 0.0100 30.003506195 0.048426271 0.048127535 6 040.063054971 0.0034196620.058477878 05 0.25000.50.3 0.071932651 0.005655312 0075201805 04 0.2 0.0748103320009023208 0.094390565 0.116289941 0 138404263 0.1 0.0 00834433720.025320376 0.160998063 0.0 0.0 00863210530.033817259 0.183894696 03 0.09000705 040,1600 06 0.3600 07 04300 08 0.6400 0.9 08100 10 10000 0.30.1 077688012 0.2 0.0 0080565692 1.4700 0.0300 avglreturn data rage) 0.08632 0.05754 EIS) E1B) Pi -stdev plretuwn data 0.18389 007615 0.0140044 dis) sdB) 003382 0.0058 VarlS) VarB)

29 30 Minimum Variance 31 Weights Portfolio Mean Variance TEIS W2TEL VarlS)tw2sqr varlB)+2 w1w Standard Deviation sdisisd(Bl'Correlation of ariance Stockslwll 00 06415427 0.00222883 0.047210483 0227700518 017783