1. As an investor you are studying the stock returns for Yahoo (YHOO), Google (GOOG) and Adobe Systems (ADBE). You are convinced that daily returns on all these assets are normally distributed.
You have collected one year of historical stock returns for all three companies (see data provided.) You want to build an investment portfolio with your money divided between just these three stocks.
Portfolio P = a*(YHOO) + b*(GOOG) + c*(ADBE)
a. Using historical returns, find the fraction of your investment in each stock (i.e., a,b, c) to maximize your return. You are risk averse, so you do not want thestandard deviation of your portfolio to exceed 0.015.
b. Also, it will be better to use Method 2 (do you know why?).
c. How should your investment in each asset (i.e., a, b, c) change if you do not wantthe standard deviation of your portfolio to exceed 0.013?
d. Based on above results can you tell which stock is more volatile? Explain.
Attachment:- Question - Data.xlsx