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QUESTION 4: PORTFOLIO ANALYSIS

The attached file contains (Returns data S2, 2014) daily returns for twenty five securities drawnfrom the NZX50 Index for the period 26th June 2013 and 24th June 2014.

4.1 Choose any two securities at random and determine (using Excel functions) the average daily returns for each company for the 12 months along with the variance and standard deviation of these returns. Next construct an equally weighted portfolio made up of the same two securities, and determine the series of daily returns. On this basis determine the average return for the portfolio and the associated variance and standard deviation.

(The averages, variances, and standard deviations can be derived using the relevant Excel functions. Utilise the Excel specification for population variance and standarddeviation - STDEVP and VARP - in the calculations).

Verify your results using the two-factor portfolio equation recalculate the average return and standard deviation of the portfolio. Explain why the portfolio standard deviation is less than the average standard deviation of individual securities. 

4.2 Choosing securities at random form equally weighted portfolios of 2, 3, 5,9, 15and 24 Securities and determine the standard deviation of these portfolios. Next plot your results for the standard deviations against the number of securities in the portfolios. Comment on your results and compare these with the results of the studies of naïve diversification. (In undertaking this analysis you can derive the results for each of the portfolios using the Excel spread-sheet).

Attachment:- Returns data.xlsx

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