Financial Econometrics (ECO764A), Spring 2019

Indian Institute of Technology Kanpur

QUESTION

1
Homework Assignment Number 1
Student Name: Utkarsh Barsaiyan
Roll Number: 160757
Date: February 11, 2019

Q1.

Expected return for asset: X

E(r) = p(s)r(s)
s

Standard deviation of asset: s

X
σ= p(s)[r(s) − E(r)]2
s

(a)

Asset 1:
1 1 1
E(r1 ) = ∗ 16 + ∗ 12 + ∗ 8 = 12
4 2 4
√
r
1 1 1
σ1 = ∗ (16 − 12)2 + ∗ (12 − 12)2 + ∗ (8 − 12)2 = 8 = 2.828
4 2 4
Asset 2:
1 1 1
E(r2 ) = ∗4+ ∗6+ ∗8=6
4 2 4
√
r
1 1 1
σ2 = ∗ (4 − 6)2 + ∗ (6 − 6)2 + ∗ (8 − 6)2 = 2 = 1.414
4 2 4
Asset3:
1 1 1
E(r3 ) = ∗ 20 + ∗ 14 + ∗ 8 = 14
4 2 4
√
r
1 1 1
σ3 = ∗ (14 − 20)2 + ∗ (14 − 14)2 + ∗ (14 − 8)2 = 18 = 4.242
4 2 4
Asset 4:
1 1 1
E(r4 ) = ∗ 16 + ∗ 12 + ∗ 8 = 12
3 3 3
√
r
1 1 1
σ4 = ∗ (16 − 12)2 + ∗ (12 − 12)2 + ∗ (8 − 12)2 = 10.67 = 3.266
3 3 3
(b)

Co-variance between two assets:

XX
Cov(r1 , r2 ) = p ∗ (r1 (i) − E(r1 )) ∗ (r2 (j) − E(r2 ))
i j

1
 1 1 1
Cov(r1 , r2 ) = ∗ (16 − 12) ∗ (4 − 6) + ∗ (12 − 12) ∗ (6 − 6) + ∗ (8 − 12) ∗ (8 − 6)
4 2 4
Cov(r1 , r2 ) = −4
1 1 1
Cov(r1 , r3 ) = ∗ (16 − 12) ∗ (20 − 14) + ∗ (12 − 12) ∗ (14 − 14) + ∗ (8 − 12) ∗ (8 − 14)
4 2 4
Cov(r1 , r3 ) = 12
1 1 1 1 1 1 1 1
Cov(r1 , r4 ) = ∗ ∗(16−12)(16−12)+ ∗ ∗(16−12)(12−12)+ ∗ ∗(16−12)(8−12)+ ∗ ∗(12−12)(16−12)
4 3 4 3 4 3 2 3
1 1 1 1 1 1
+ ∗ ∗ (12 − 12)(12 − 12) + ∗ ∗ (12 − 12)(8 − 12) + ∗ ∗ (8 − 12)(16 − 12)+
2 3 2 3 4 3
1 1 1 1
∗ ∗ (8 − 12)(12 − 12) + ∗ ∗ (8 − 12)(8 − 12)
4 3 4 3
Cov(r1 , r4 ) = 0
1 1 1
Cov(r2 , r3 ) = ∗ (4 − 6) ∗ (20 − 14) + ∗ (6 − 6) ∗ (14 − 14) + ∗ (8 − 6) ∗ (8 − 14)
4 2 4
Cov(r2 , r3 ) = −6
1 1 1 1 1 1 1 1
Cov(r2 , r4 ) = ∗ ∗(4−6)(16−12)+ ∗ ∗(4−6)(12−12)+ ∗ ∗(4−6)(8−12)+ ∗ ∗(6−6)(16−12)
4 3 4 3 4 3 2 3
1 1 1 1 1 1
+ ∗ ∗ (6 − 6)(12 − 12) + ∗ ∗ (6 − 6)(8 − 12) + ∗ ∗ (8 − 6)(16 − 12)+
2 3 2 3 4 3
1 1 1 1
∗ ∗ (8 − 6)(12 − 12) + ∗ ∗ (8 − 6)(8 − 12)
4 3 4 3
Cov(r2 , r4 ) = 0
1 1 1 1 1 1 1 1
Cov(r3 , r4 ) = ∗ ∗(20−14)(16−12)+ ∗ ∗(20−14)(12−12)+ ∗ ∗(20−14)(8−12)+ ∗ ∗(14−14)(16−12)
4 3 4 3 4 3 2 3
1 1 1 1 1 1
+ ∗ ∗ (14 − 14)(12 − 12) + ∗ ∗ (14 − 14)(8 − 12) + ∗ ∗ (8 − 14)(16 − 12)+
2 3 2 3 4 3
1 1 1 1
∗ ∗ (8 − 14)(12 − 12) + ∗ ∗ (8 − 14)(8 − 12)
4 3 4 3
Cov(r3 , r4 ) = 0
The correlation coefficient is defined as:
Cov(ri , rj )
ρij =
σi σj

Cov(r1 , r2 )
ρ12 =
σ1 σ2
−4
ρ12 = = −1
2.828 ∗ 1.414
12
ρ13 = =1
2.828 ∗ 4.242
0
ρ14 = =0
2.828 ∗ 3.266
−6
ρ23 = = −1
1.414 ∗ 4.242

2
 0
ρ24 = =0
1.414 ∗ 3.266
0
ρ34 = =0
4.242 ∗ 3.266
(c)

P ortf olio Asset1 Asset2 Asset3 Asset4 ExpectedReturn StdDev

A 1/2 1/2 0 0 9 0.707
B 1/2 0 1/2 0 13 3.53
C 1/2 0 0 1/2 12 2.163
D 0 1/2 1/2 0 10 1.414
E 0 0 1/2 1/2 13 2.67
F 1/3 1/3 1/3 0 32/3 1.88
G 0 1/3 1/3 1/3 32/3 1.43
H 1/3 0 1/3 1/3 16 2.59
I 1/4 1/4 1/4 1/4 11 1.63

(d)

3
Financial Econometrics (ECO764A), Spring 2019
Indian Institute of Technology Kanpur
QUESTION

2
Homework Assignment Number 1
Student Name: Utkarsh Barsaiyan
Roll Number: 160757
Date: February 11, 2019

Q2.

Given:
Security W eights StdDev
1 0.3 0.05
2 0.2 0.06
3 0.2 0.12
3 0.3 0.08
And correlation matrix:  
1 0.2 0.6 0.3
 0.2 1 0.4 0.6 
ρ=
 0.6 0.4 1 0.5 


0.3 0.6 0.5 1

Covariance Matrix is given by Σij = ρij σi σj :
 
0.0025 0.0006 0.0036 0.0012
 0.0006 0.0036 0.0012 0.0029 
Σ=
 0.0036

0.0029 0.0144 0.0048 
0.0012 0.0029 0.0048 0.0064

Standard Deviation of Portfolio Return: wT Σw = 5.825

4
Financial Econometrics (ECO764A), Spring 2019
Indian Institute of Technology Kanpur
QUESTION

3
Homework Assignment Number 1
Student Name: Utkarsh Barsaiyan
Roll Number: 160757
Date: February 11, 2019

Q3.

(a)
1 1
E(rA ) = ∗ Σ(rt ) = ∗ (8 + 10 − 6 − 1 + 9) = 4%
T 5
1 1
E(rB ) = ∗ Σ(rt ) = ∗ (10 + 6 − 9 + 4 + 11) = 4.4%
T 5
1 1
E(rC ) = ∗ Σ(rt ) = ∗ (9 + 6 + 3 + 5 + 8) = 6.2%
T 5
1 1
E(rD ) = ∗ Σ(rt ) = ∗ (10 + 8 + 13 + 7 + 12) = 10%
T 5
(b)
1 1
E(rAB ) = 0.5 ∗ E(rA ) + 0.5 ∗ E(rB ) = ∗ 4 + ∗ 4.4 = 4.2%
2 2
1 1
E(rAC ) = 0.5 ∗ E(rA ) + 0.5 ∗ E(rC ) = ∗ 4 + ∗ 6.2 = 5.1%
2 2
1 1
E(rAD ) = 0.5 ∗ E(rA ) + 0.5 ∗ E(rD ) = ∗ 4 + ∗ 10 = 7%
2 2
1 1
E(rBC ) = 0.5 ∗ E(rB ) + 0.5 ∗ E(rC ) = ∗ 4.4 + ∗ 6.2 = 5.3%
2 2
1 1
E(rBD ) = 0.5 ∗ E(rB ) + 0.5 ∗ E(rD ) = ∗ 4.4 + ∗ 10 = 7.2%
2 2
1 1
E(rCD ) = 0.5 ∗ E(rC ) + 0.5 ∗ E(rD ) = ∗ 6.2 + ∗ 10 = 8.1%
2 2
(c)
1 1 1
E(rABC ) = wA ∗ E(rA ) + wB ∗ E(rB ) + wC ∗ E(rC ) = ∗ 4 + ∗ 4.4 + ∗ 6.2 = 4.86%
3 3 3
1 1 1
E(rABD ) = wA ∗ E(rA ) + wB ∗ E(rB ) + wD ∗ E(rD ) = ∗ 4 + ∗ 4.4 + ∗ 10 = 6.1333%
3 3 3
1 1 1
E(rACD ) = wA ∗ E(rA ) + wC ∗ E(rC ) + wD ∗ E(rD ) = ∗ 4 + ∗ 6.2 + ∗ 10 = 6.733%
3 3 3
1 1 1
E(rBCD ) = wB ∗ E(rB ) + wC ∗ E(rC ) + wD ∗ E(rD ) = ∗ 4.4 + ∗ 6.2 + ∗ 10 = 6.86%
3 3 3
(d)
1 1 1 1
E(rABCD ) = 0.25E(rA )+0.25E(rB )+0.25E(rC )+0.25E(rD ) = 4+ 4.4+ 6.2+ 10 = 6.15%
4 4 4 4

5
Financial Econometrics (ECO764A), Spring 2019
Indian Institute of Technology Kanpur
QUESTION

4
Homework Assignment Number 1
Student Name: Utkarsh Barsaiyan
Roll Number: 160757
Date: February 11, 2019

Q4.

According to dividend discount model,

expected dividend growth rate
The value of stock, Po =
r−g

where, r = required rate of return of asset or capital equity cost = Ra = 22%

g = growth rate of dividend = 12%
Rm = 16%,
β = 1.6
Initial value of stock per share is Rs. 260

(a)

D1 = Po ∗ (r − g) = 260 ∗ (.22 − .12) = 26

D1 26
D0 = = = 23.21
1+g 1.12
According to CAPM,
Ra = rf + β(RM − rf )
0.22 = rf + 1.6 ∗ (0.16 − rf )
rf = 0.06%
(b)

original revised
rf 6% 11%
Rm − rf 10% 5%
g 12% 10%
βa 1.6 1.1
Using CAPM:
Ra0 = 11 + 1.1 ∗ (5) = 16.5%
Price per share of stock given the above changes:
23.21 ∗ 1.10
= Rs.392.78
0.165 − 0.10

6
Financial Econometrics (ECO764A), Spring 2019
Indian Institute of Technology Kanpur
QUESTION

5
Homework Assignment Number 1
Student Name: Utkarsh Barsaiyan
Roll Number: 160757
Date: February 11, 2019

Q5.

Given, wT = 0.6, wF = 0.4, σT = 0.363, σF = 0.34, and ρ = 0.34.

(a)
σP2 = wT2 ∗ V arT + wF2 ∗ V arF + 2 ∗ ρ ∗ σT ∗ σF
σP2 = 0.62 ∗ 0.3632 + 0.42 ∗ 0.342 + 2 ∗ 0.34 ∗ 0.363 ∗ 0.34
σP2 = 0.08607
σP = 0.2934
(b) Contribution of TATA stock to the porfolio variance:

wT2 × Cov(rT , rT ) + wT wF × Cov(rT , rF )

σp2

Hence contribution of TATA = 66.80%

and contribution of Flipkart = 33.20%

Cov(0.4 ∗ RF lipkart , RP ortf olio )

(c) βF lipkart =
σP2

Cov(0.4 ∗ RF lipkart , 0.6 ∗ RT AT A + 0.4 ∗ RF lipkart )

=
σP2
0.42 ∗ Cov(RF lipkart , RF lipkart ) + 0.4 ∗ 0.6 ∗ CovRF lipkart , RT AT A
=
σP2
0.42 ∗ 0.342 + 0.4 ∗ 0.6 ∗ 0.363 ∗ 0.34 ∗ 0.34
=
0.0860
= 0.332

Cov(0.6 ∗ RT AT A , RP ortf olio )

βT AT A =
σP2

Cov(0.4 ∗ RT AT A , 0.6 ∗ RT AT A + 0.4 ∗ RF lipkart )

=
σP2
0.62 ∗ Cov(RT AT A , RT AT A ) + 0.4 ∗ 0.6 ∗ CovRF lipkart , RT AT A
=
σP2
0.62 ∗ 0.3632 + 0.4 ∗ 0.6 ∗ 0.363 ∗ 0.34 ∗ 0.34
=
0.0860
= 0.6686

7
(d) The table shown concludes all the weights and returns etc. and the graph is also shown:

σT AT A = 0.363

σF lipkart = 0.34

ρT AT A,F lipkart = 0.34

E(RT AT A ) = 0.075

E(RF lipkart ) = 0.125

Weight for TATA Weight for Flipkart Exp Return Variance Std Dev

0 1 0.125 0.1156 0.34

0.1 0.9 0.12 0.1025 0.3201

0.2 0.8 0.115 0.0926 0.3044

0.3 0.7 0.11 0.08612 0.2934

0.4 0.6 0.105 0.0828 0.2878

0.5 0.5 0.1 0.0828 0.2877

0.6 0.4 0.095 0.0860 0.2933

0.7 0.3 0.09 0.0925 0.3042

0.8 0.2 0.085 0.1023 0.3199

0.9 0.1 0.08 0.1154 0.3397

1 0 0.075 0.1317 0.363

8
(e) Weights of the minimum variance portfolio:

σF2 lipkart − Cov(T AT A, F lipkart)

WT AT A =
σF2 lipkart + σT2 AT A − 2 ∗ Cov(T AT A, F lipkart)
0.342 − 0.363 ∗ 0.34 ∗ 0.34
=
0.342 + 0.3632 − 2 ∗ 0.363 ∗ 0.34 ∗ 0.34
= 0.45
WF lipkart = 1 − WT AT A
= 0.55

Standard deviation of the minimum variance:

σP2 = ΣΣwi ∗ wj ∗ Cov(ri , rj )

= 0.452 ∗ 0.3632 + 0.552 ∗ 0.342 + 2 ∗ 0.363 ∗ 0.45 ∗ 0.55 ∗ 0.34 ∗ 0.34
= 0.082
√
σP = 0.082 = 0.28

(f) The table shown concludes all the weights and returns etc. and the graph is also shown:

σT AT A = 0.363

σF lipkart = 0.34

ρT AT A,F lipkart = 1

E(RT AT A ) = 0.075

9
E(RF lipkart ) = 0.125

Weight for TATA Weight for Flipkart Exp Return Variance Std Dev

0 1 0.125 0.1156 0.34

0.1 0.9 0.12 0.1171 0.3423
0.2 0.8 0.115 0.1187 0.3446
0.3 0.7 0.11 0.1203 0.3469
0.4 0.6 0.105 0.1219 0.3492
0.5 0.5 0.1 0.1235 0.3515
0.6 0.4 0.095 0.1251 0.3538
0.7 0.3 0.09 0.1268 0.3561
0.8 0.2 0.085 0.1284 0.3584
0.9 0.1 0.08 0.1301 0.3607
1 0 0.075 0.1317 0.363

10
Financial Econometrics (ECO764A), Spring 2019
Indian Institute of Technology Kanpur
QUESTION

6
Homework Assignment Number 1
Student Name: Utkarsh Barsaiyan
Roll Number: 160757
Date: February 11, 2019

Q6.

E(Rreliance ) − rf = 5%
rf = 4%
βreliance = 1.5
According to the CAPM model,

E(RA ) = rf + β ∗ (Risk Premium)

E(Rreliance ) = 4 + 1.5 ∗ 5 = 11.5%

As per the CAPM model, expected rate of return from the stock of reliance industries is 11.5%.

11
Financial Econometrics (ECO764A), Spring 2019
Indian Institute of Technology Kanpur
QUESTION

7
Homework Assignment Number 1
Student Name: Utkarsh Barsaiyan
Roll Number: 160757
Date: February 11, 2019

Q7.

E(RGodrej ) = 13%
rf = 4%
βGodrej = 0.75
According to CAPM model,

E(RGodrej ) = rf + β ∗ (Risk Premium)

13 = 4 + 0.75 ∗ (Risk Premium)

Risk Premium = 12%
E(Rmarket ) = Risk Premium + rf = 12 + 4 = 16%

12
Financial Econometrics (ECO764A), Spring 2019
Indian Institute of Technology Kanpur
QUESTION

8
Homework Assignment Number 1
Student Name: Utkarsh Barsaiyan
Roll Number: 160757
Date: February 11, 2019

Q8.

(a)

Total portfolio value = 300 ∗ 10 + 50 ∗ 40 = Rs. 5000

Portfolio weights,

300 ∗ 10
wA = = 0.6
5000
50 ∗ 40
wB = = 0.4
5000
Expected Return = 0.6 ∗ 8% + 0.4 ∗ 13% = 10%

(b)

New portfolio value = 300 ∗ 12 + 50 ∗ 36 = Rs. 5400

Return is (5400 − 5000)/5000 = 8%
New portfolio weights are,
300 ∗ 12
wA = = 66.67%
5400
50 ∗ 36
wB = = 33.33%
5400

13
Financial Econometrics (ECO764A), Spring 2019
Indian Institute of Technology Kanpur
QUESTION

9
Homework Assignment Number 1
Student Name: Utkarsh Barsaiyan
Roll Number: 160757
Date: February 11, 2019

Q9.

(a)

E(r)P = wE(r1 ) + (1 − w)E(r2 )

q
σP = w2 σ12 + (1 − w)2 σ22 + 2ρ12 w(1 − w)σ1 σ2
(b)

If ρXY = 0 and w = 0.4,

E(r)P = 10.2%
σP = 24.08%
If ρXY = 1 and w = 0.4,
E(r)P = 10.2%
σP = 34%
If ρXY = −1 and w = 0.4,
E(r)P = 10.2%
σP = 2%
(c)

For no volatility, σP = 0. And it is given that ρXY = −1.

q
σP = w2 σ12 + (1 − w)2 σ22 + 2ρ12 w(1 − w)σ1 σ2 = 0
p
σP = w2 (40)2 + (1 − w)2 (30)2 + 2ρ12 w(1 − w)(40 ∗ 30) = 0
3
w=
7

14
Financial Econometrics (ECO764A), Spring 2019
Indian Institute of Technology Kanpur
QUESTION

10
Homework Assignment Number 1
Student Name: Utkarsh Barsaiyan
Roll Number: 160757
Date: February 11, 2019

Q10.

According to CAPM,
E(rP ) = rF + β ∗ E(rM )
It is given that rF = 5%, E(rM ) = 8%, β = 1.5

Hence, E(rP ) = 17%.

Using corrected βc :

βc = 0.8 + 0.2 ∗ β = 1.1

E(rPc ) = 5% + 1.1 ∗ 8% = 13.8%
The answer is (ii). The stock is overvalued and CAPM required return is 13.8%.

15
Financial Econometrics (ECO764A), Spring 2019
Indian Institute of Technology Kanpur
QUESTION

11
Homework Assignment Number 1
Student Name: Utkarsh Barsaiyan
Roll Number: 160757
Date: February 11, 2019

Q11.

2 −σ
σX XY
wX = 2 + σ 2 − 2σ
σX Y XY

• ρXY = 0 means σXY = 0 and wX = 0.09/(0.09 + 0.16)

p = 0.36 = 36%. Expected return =
0.36∗(15%)+0.64∗(7%) = 9.88% and volatility = (0.36)2 ∗ (0.40)2 + (0.64)2 ∗ (0.30)2 =
24%

• ρXY = 0.4 means σXY = 0.4 ∗ 0.3 ∗ 0.4 = 0.048 and wX = (0.09 − 0.048)/(0.09 + 0.16 − 2 ∗
p = 27.27%. Expected return = 0.2727 ∗ (15%) + 0.7273 ∗ (7%) = 9.18% and volatility
0.048)
= (0.2727)2 ∗ (0.40)2 + (0.7273)2 ∗ (0.30)2 + 2(0.048)(0.2727)(0.7273) = 28.03%

• ρXY = −0.4 means σXY = 0.4 ∗ 0.3 ∗ −0.4 = −0.048 and wX = (0.09 + 0.048)/(0.09 +
0.16 + 2 ∗ 0.048)p
= 39.88%. Expected return = 0.3988 ∗ (15%) + 0.6012 ∗ (7%) = 10.19%
and volatility = (0.3988)2 ∗ (0.40)2 + (0.6012)2 ∗ (0.30)2 + 2(−0.048)(0.3988)(0.6012) =
18.70%

• Tangent Portfolios:
R̂ = [0.150.03, 0.070.03] = [0.12, 0.04]

When ρXY = 0,

 
0.16 0.00
Σ=
0.00 0.09
   
−1 1 0.09 0.00 6.25 0.00
Σ = =
(0.16)(0.09) 0.00 0.16 0.00 11.11
x∗ ∝ Σ−1 R̂ = [0.75, 0.444]
eT Σ−1 R̂ = 0.75 + 0.444 = 1.194
x∗ = [0.628, 0.372]
E[RP ] = 0.628(0.15) + 0.372(0.07) = 0.1202
R̂0 = E[RP ] − rf = 0.0902
R̂0
V ar(RP ) = = 0.0755
e Σ−1 R̂
√
T

σP = 0.0755 = 27.48%

16
When ρXY = 0.4,
 
0.16 0.048
Σ=
0.048 0.09
   
−1 1 0.09 −0.048 7.4405 −3.9683
Σ = =
(0.16)(0.09) − (0.048)2 −0.048 0.16 −3.9683 13.2275
x∗ ∝ Σ−1 R̂ = [0.7341, 0.0529]
eT Σ−1 R̂ = 0.7341 + 0.0529 = 0.7870
x∗ = [0.9328, 0.0672]
E[RP ] = 0.9328(0.15) + 0.0672(0.07) = 0.1446
R̂0 = E[RP ] − rf = 0.1146
R̂0
V ar(RP ) = = 0.1456
e Σ−1 R̂
√
T

σP = 0.1456 = 38.16%

When ρXY = −0.4 (Proceeding as above):

 
0.16 −0.048
Σ=
−0.048 0.09
x∗ = [0.3988, 0.6012]
E[RP ] = 0.3988(0.15) + 0.6012(0.07) = 0.1019
R̂0 = E[RP ] − rf = 0.0719
R̂0
V ar(RP ) = = 0.0035
e T Σ−1 R̂
√
σP = 0.0035 = 5.92%

17
Financial Econometrics (ECO764A), Spring 2019
Indian Institute of Technology Kanpur
QUESTION

12
Homework Assignment Number 1
Student Name: Utkarsh Barsaiyan
Roll Number: 160757
Date: February 11, 2019

Q12.

(a) βReliance = 0.8, βDLF = 1.7

Cov(RM arket , RBAT A ) 28
βBAT A (Calculated from the table) = 2 = = 1.16
σM arket 24
8 8 4
wRELIAN CE = = 0.4, wDLF = = 0.4, and wBAT A = = 0.2
20 20 20
E(RM arket ) = 0.3(−2) + 0.4(7) + 0.3(26) = 10.0%
Now, using CAPM, we have

E(RReliance ) = rf + βreliance [E(Rmarket ) − rf ] = 7 + 0.8 ∗ (10 − 7) = 9.4%

E(RDLF ) = rf + βDLF [E(Rmarket ) − rf ] = 7 + 1.7 ∗ (10 − 7) = 12.1%

E(RBAT A ) = rf + βBAT A [E(Rmarket ) − rf ] = 7 + 1.16 ∗ (10 − 7) = 10.48%
E(RP ) = Σwi E(Ri ) = 0.4 ∗ 9.4 + 0.4 ∗ 12.1 + 0.2 ∗ 10.48 = 10.696%
2
Also, σReliance 2
= 8.61%, σDLF = 93.81% and σBAT A = 192.84%

Cov(RBAT A , RReliance ) = −27.81%

Cov(RDLF , RReliance ) = −11.91%
Cov(RBAT A , RDLF ) = 128.58%
2
σD = ΣΣwi ∗ wj ∗ Cov(ri , rj )
2
σD = 0.4∗0.4∗93.81+0.4∗0.4∗8.61+0.2∗0.2∗192.84+2∗0.4∗0.4∗(−11.91)+2∗0.4∗0.2∗((−27.81)+128.58)
2
σD = 36.41%
√
σD = 0.3641 = 60.3%
(b)

E(RReliance ) = ΣP (s)(R(s)) = 0.3 ∗ 15 + 0.4 ∗ 8 + 0.3 ∗ 12 = 11.3%

E(RDLF ) = ΣP (s)(R(s)) = 0.3 ∗ 5 + 0.4 ∗ 18 + 0.3 ∗ 30 = 18.7%
E(RBAT A ) = ΣP (s)(R(s)) = 0.3 ∗ (−10) + 0.4 ∗ 16 + 0.3 ∗ 24 = 10.6%
As the expected rate of interest from CAPM for Reliance was 9.4% but it is forecasted to be
11.3%, the Reliance stock is undervalued.
Similarly, expected rate of interest from CAPM for DLF was 12.1% but it is forecasted to be
18.7%, hence, the DLF stock is undervalued.
Also, the expected rate of interest from CAPM for BATA was 11.08% but it is forecasted to be
10.6%, hence, the BATA stock is overvalued.

18
Financial Econometrics (ECO764A), Spring 2019
Indian Institute of Technology Kanpur
QUESTION

13
Homework Assignment Number 1
Student Name: Utkarsh Barsaiyan
Roll Number: 160757
Date: February 11, 2019

Q13.

σP2 − σP Q
wP =
σP2 + σQ2 − 2σ
PQ

• ρP Q = 0 means
p σP Q = 0 and wP = 0.64/(0.09 + 0.64) = 87.67%.
Volatility = (0.8767)2 ∗ (0.30)2 + (0.1233)2 ∗ (0.80)2 = 28.09%

• ρP Q = 0.6 means σP Q = 0.3 ∗ 0.8 ∗ 0.6 = 0.144 and wP = (0.64 − 0.144)/(0.09 + 0.64 − 2 ∗
0.144) = 112.22%
p
Volatility = (1.1222)2 ∗ (0.30)2 + (−0.1222)2 ∗ (0.80)2 + 2(0.144)(1.1222)(−0.1222) =
28.88%

• ρP Q = −0.6 means σP Q = 0.3 ∗ 0.8 ∗ (−0.6) = −0.144 and wP = (0.64 + 0.144)/(0.09 +

0.64 + 2 ∗ 0.144)
p = 77.01%
Volatility = (0.7701)2 ∗ (0.30)2 + (0.2299)2 ∗ (0.80)2 + 2(−0.144)(0.7701)(0.2299) = 19.03%

• Tangent Portfolios:
R̂ = [0.100.02, 0.060.02] = [0.08, 0.04]

When ρP Q = 0,

 
0.09 0.00
Σ=
0.00 0.64
   
−1 1 0.64 0.00 11.11 0.00
Σ = =
(0.09)(0.64) 0.00 0.09 0.00 1.5625
x∗ ∝ Σ−1 R̂ = [0.888, 0.0625]
eT Σ−1 R̂ = 0.888 + 0.0625 = 0.9514
x∗ = [0.9343, 0.0657]
E[RP ] = 0.9343(0.10) + 0.0657(0.06) = 0.0974
R̂0 = E[RP ] − rf = 0.0774
R̂0
V ar(RP ) = = 0.0814
e Σ−1 R̂
√
T

σP = 0.0814 = 28.53%

19
When ρP Q = 0.6,
 
0.09 0.144
Σ=
0.144 0.64
   
−1 1 0.64 −0.144 17.3611 3.9063
Σ = =
(0.09)(0.64) − (0.144)2 −0.144 0.09 3.9063 2.4414
x∗ ∝ Σ−1 R̂ = [1.2326, 0.2148]
eT Σ−1 R̂ = 1.23260.2148 = 1.0178
x∗ = [1.211, 0.211]
E[RP ] = 1.211(0.10) + 0.211(0.06) = 0.1084
R̂0 = E[RP ] − rf = 0.0884
R̂0
V ar(RP ) = = 0.0869
eT Σ−1 R̂
√
σP = 0.0869 = 29.48%

When ρP Q = −0.6 (Proceeding as above):

 
0.09 0.144
Σ=
0.144 0.64
x∗ = [0.7271, 0.1930]
E[RP ] = 0.7902(0.10) + 0.2098(0.06) = 0.0916
R̂0 = E[RP ] − rf = 0.0716
R̂0
V ar(RP ) = = 0.0778
e Σ−1 R̂
√
T

σP = 0.0778 = 27.89%

20
Financial Econometrics (ECO764A), Spring 2019
Indian Institute of Technology Kanpur
QUESTION

14
Homework Assignment Number 1
Student Name: Utkarsh Barsaiyan
Roll Number: 160757
Date: February 11, 2019

Q14.

Let the weights of the three assets be w1 , w2 and w3 . The first-order optimality conditions are
w = e and w1 + w2 + w3 = 1.

0.09w1 + 0.045w2 + 0.01w3 = λ

0.045w1 + 0.25w2 + 0.06w3 = λ
0.01w1 + 0.06w2 + 0.04w3 = λ
Solving above equations, we get w1 = 0.2923, w2 = −0.1434 and w3 = 0.8512.

The minimum variance value = λ = 0.02836.

21
Financial Econometrics (ECO764A), Spring 2019
Indian Institute of Technology Kanpur
QUESTION

15
Homework Assignment Number 1
Student Name: Utkarsh Barsaiyan
Roll Number: 160757
Date: February 11, 2019

Q15.

(a) Equation of the capital market line is,

0.10 − 0.02
RP = 0.02 + σP = 0.02 + 0.02σP
0.40

(b) For an efficient portfolio whose expected return is 8%, we have 0.08 = 0.02 + 0.20σP =⇒
σP = 30%. Allocate $750 to the tangent portfolio and $250 to the risk-free asset.

22
Financial Econometrics (ECO764A), Spring 2019
Indian Institute of Technology Kanpur
QUESTION

16
Homework Assignment Number 1
Student Name: Utkarsh Barsaiyan
Roll Number: 160757
Date: February 11, 2019

Q16.

(a) Equation of the capital market line is,

0.12 − 0.03
RP = 0.03 + σP = 0.03 + 0.30σP
0.30

(b) For an efficient portfolio whose expected return is 16%, we have 0.165 = 0.03 + 0.30σP =⇒
σP = 45%. Allocate $4500 to the tangent portfolio and borrow $1500 at the risk-free asset.

23
Financial Econometrics (ECO764A), Spring 2019
Indian Institute of Technology Kanpur
QUESTION

17
Homework Assignment Number 1
Student Name: Utkarsh Barsaiyan
Roll Number: 160757
Date: February 11, 2019

Q17.

Given:
Risk free rate = 3%,
Market risk premium = 9%, and
σM arket = 30%

(a) Equation of SML:

E(RP ) = rf + β ∗ (Riskpremium)
E(RP ) = 3 + β ∗ (9)
(b) Given β = 0.6.
E(RP ) = rf + β ∗ (Riskpremium)
E(RP ) = 3 + 0.6 ∗ (9) = 8.4%
(c) Given,
σstock = 60%
Corr(stock, market) = 25%
σstock ∗ σmarket ∗ Corr(stock, market)
β= 2
σmarket
(0.6) ∗ (0.3) ∗ (0.25)
β= = 0.5
(0.3) ∗ (0.3)
E(RP ) = 3 + 0.5 ∗ (9) = 7.5
(d) Given,
σstock = 80%
Corr(stock, market) = −25%

(0.8) ∗ (0.3) ∗ (−0.25)

β= = −0.667
(0.3) ∗ (0.3)
E(RP ) = 3 + (−0.66) ∗ (9) = −3%

24
Financial Econometrics (ECO764A), Spring 2019
Indian Institute of Technology Kanpur
QUESTION

18
Homework Assignment Number 1
Student Name: Utkarsh Barsaiyan
Roll Number: 160757
Date: February 11, 2019

Q18.

Given,
rf = 2%, RM = 12%,
βX = 1.2 , βY = 0.8

(a) According to CAPM,

E(RX ) = rf + β ∗ (Risk premium)

E(RX ) = 2 + 1.20 ∗ (12 − 2) = 14%
E(RY ) = 2 + 0.8 ∗ (12 − 2) = 10%
(b) Expected return:
E(RP ) = 0.5 ∗ E(RX ) + 0.5 ∗ E(RY )
E(RP ) = 0.5 ∗ 14 + 0.5 ∗ 10 = 12%
(c) We have E(RP ) = 12%,
12 = 2 + β ∗ (12 − 2)
β=1
(d) According to CAPM,
E(RP ) = rf + β ∗ (Riskpremium)
β=1
E(RP ) = 2 + 1 ∗ (12 − 2) = 12%

25
Financial Econometrics (ECO764A), Spring 2019
Indian Institute of Technology Kanpur
QUESTION

19
Homework Assignment Number 1
Student Name: Utkarsh Barsaiyan
Roll Number: 160757
Date: February 11, 2019

Q19.

Cov(RX , RM ) = Cov(RX , 0.5RX + 0.5RY )

2
= 0.5σX + 0.5σXY = 0.5(0.2)2 + 0.5(0.2)(0.4)(0.75) = 0.05
V ar(RM ) = (0.5)2 (0.2)2 + (0.5)2 (0.4)2 + 2(0.5)(0.5)(0.2)(0.4)(0.75) = 0.08
βX = 0.05/0.08 = 0.625
=⇒ RX = 0.02 + 0.625 ∗ (0.110.02) = 7.625%

(a) 0.5βX + 0.5βY = 1. Since βX = 0.625, βY = 1.375.

(b) 0.5RX + 0.5RY = 11%, the markets expected return. Since RX = 7.625%, RY = 14.375%.

26
Financial Econometrics (ECO764A), Spring 2019
Indian Institute of Technology Kanpur
QUESTION

20
Homework Assignment Number 1
Student Name: Utkarsh Barsaiyan
Roll Number: 160757
Date: February 11, 2019

Q20.

Value of the market portfolio = 200($3) + 300($4) = $1, 800.

Portfolio weights are wX = 1/3 and wY = 2/3.

RM = 1/3(16%) + 2/3(10%) = 12%

Volatility = σXY = σX σY ρXY = (0.3)(.15)(0.4) = 0.018
Cov(RX , RM ) = Cov(RX , 1/3RX + 2/3RY )
2
= 1/3(σX ) + 2/3σXY = 1/3(0.3)2 + 2/3(0.018) = 0.042
V ar(RM ) = (1/3)2 (0.3)2 + (2/3)2 (0.15)2 + 2(1/3)(2/3)(0.018) = 0.028
βX = 0.042/0.028 = 1.5 =⇒ 16 = rf + 1.5(12rf ) =⇒ rf = 4%

The markets beta of 1 equals 1/3βX + 2/3βY . Since βX = 1.5, this implies that βY = 0.75.
SML holds for security B as the market portfolio is efficient.

27
Financial Econometrics (ECO764A), Spring 2019
Indian Institute of Technology Kanpur
QUESTION

21
Homework Assignment Number 1
Student Name: Utkarsh Barsaiyan
Roll Number: 160757
Date: February 11, 2019

Q21.

Given, Rf = 2% and portfolio weights are w1 = 1/2 and w2 = 1/2.

(a)

Market Return, R¯M = w1 R1 + w2 R2

R¯M = 0.5(13%) + 0.5(17%) = 15%.

Excess Returns
Sharpe Ratio = Volatility

Sharpe Ratio of value stocks = (0.13 0.02)/0.12 = 0.916

Sharpe Ratio of growth stocks = (0.17 0.02)/0.25 = 0.6

MarketpVolatility,
σM = (0.5)2 (0.12)2 + (0.5)2 (0.25)2 + 2(0.5)(0.5)(0.12)(0.25)(0.5) = 16.3%

(b)

Sharpe ratio for M is (0.150.02)/0.163 ≈ 0.8

Since the Sharpe ratio for M is less than the Sharpe ratio for the value portfolio, the market
portfolio is not efficient. Thus, CAPM does not hold here.
According to CAPM, investors could reallocate their investments to improve the Sharpe ratio so
that they could achieve a higher expected return for the same level of volatility or, alternatively,
they could reduce their volatility and still achieve the same expected return.

28
Financial Econometrics (ECO764A), Spring 2019
Indian Institute of Technology Kanpur
QUESTION

22
Homework Assignment Number 1
Student Name: Utkarsh Barsaiyan
Roll Number: 160757
Date: February 11, 2019

Q22.

Given all the data, we can compute and compare the sharpe ratios of the two funds and rec-
ommend the one with the greater sharpe ratio.

Excess Returns R−Rf

Sharpe Ratio = Volatility = σ

Sharpe ratio of fund P1 is (0.13 0.04)/0.20 = 0.45

Sharpe ratio of fund P2 is (0.18 0.04)/0.30 = 0.467

Hence, fund P2 should be recommended.

29
Financial Econometrics (ECO764A), Spring 2019
Indian Institute of Technology Kanpur
QUESTION

23
Homework Assignment Number 1
Student Name: Utkarsh Barsaiyan
Roll Number: 160757
Date: February 11, 2019

Q23.

Given, ρB,M = 0
=⇒ Cov(B, M ) = 0
=⇒ βB,M = 0

(a) The required return for stock B to compensate for its risk to fund M is the risk-free rate
of 3.8%. Since stock Bs expected return is higher, it will be beneficial to add stock B to the
portfolio with a positive weight. Therefore, the wealth manager is right.

(b) Expected return of new portfolio = wM RM + wB RB

Rp = 0.4(20%) + 0.6(14%) = 16.4%.

2 = 0.144
Also, σBM = Cov(RB , 0.4RB + 0.6RF ) = 0.4σB

V ar(RP ) = (0.4)2 (0.6)2 + (0.6)2 (0.2)2 = 0.072

P = 0.144/0.072 = 2
βB

R¯B = 3.8% + 2(16.4%3.8%) = 29%

As the actual expected return for stock B is 20% which is less than 29%, the Sharpe ratio can
be increased by reducing the weight of B in the portfolio. So, the friend is right.

(c) The new portfolio P has an expected return of 0.15(20%) + 0.85(14%) = 14.9%.

Also, σBM = Cov(RB , 0.15RB + 0.6RF ) = 0.15σB 2 = 0.054

V ar(RP ) = (0.15)2 (0.6)2 + (0.85)2 (0.2)2 = 0.037

P = 0.054/0.037 = 1.459
βB

R¯B = 3.8% + 1.459(14.9%3.8%) = 20%

As the actual expected return for the stock B is 20%, this is the correct weight.

30
Financial Econometrics (ECO764A), Spring 2019
Indian Institute of Technology Kanpur
QUESTION

24
Homework Assignment Number 1
Student Name: Utkarsh Barsaiyan
Roll Number: 160757
Date: February 11, 2019

Q24.

R¯P = 0.5(20%) + 0.5(12%) = 16%

Cov(RSBI , RDSP ) = σSBI σDSP ρSBI,DSP = (0.8)(0.25)(0.2) = 0.04

DSP = 0.04/(0.25)2 = 0.64

βSBI

RSBI = 4% + 0.64(16%4%) = 9.12%.

(a) Since the actual expected return of the SBI fund is 20%which is greater than 9.12%, the
Sharpe ratio can be increased by adding the SBI fund to the DSP Fund with a positive weight.
Therefore, the wealth manager is right.

(b) Sharpe ratio of the DSP Fund = (0.12 0.04)/0.25 = 0.32.

Now we have w1 = 1/2 and w2 = 1/2

0.16−0.04
New Sharpe ratio = √ = 0.2713
(0.5)2 (0.8)2 +(0.5)2 (0.25)2 +2(0.5)(0.5)(0.04)

(c) Let x be the amount to invest in the SBI fund per rupee invested in the DSP Fund.

Optimal value of x,
2
σDSP RSBI σSBI,DSP RDSP
x∗ = 2
σSBI RDSP σSBI,DSP RSBI
(0.25)2 (0.16)(0.040)(0.08)
x∗ = = 0.15179
(0.8)2 (0.08)(0.04)(0.16)
The portfolio weight on SBI fund is x/(1 + x) = 0.15179/1.15179 = 13.18%.
Optimal fraction of wealth to invest in the SBI fund = 13.18%.

31
Financial Econometrics (ECO764A), Spring 2019
Indian Institute of Technology Kanpur
QUESTION

25
Homework Assignment Number 1
Student Name: Utkarsh Barsaiyan
Roll Number: 160757
Date: February 11, 2019

Q25.

Using Excel, the minimum variance portfolio has weights of HDFC and BATA as -0.43039
(short) and 1.43039 respectively. Excel file is attached below.

32
Part (A)
Consider the HDFC and BATA as the two stocks

Date HDFC BATA ASIANPAINT MARUTI AXISBANK MVec Variance SUM of MVec
2014-02-28 157.895004 400.049988 252 1582 471.5 -0.430389731 839186.8847 1
2014-03-31 179 468 294 1976 547.75 1.430389731
2014-04-30 186.990005 467.899994 303.440002 1923 505.149994
2014-05-31 203.580002 537.375 366.450012 2270 504.350006
2014-06-30 202.399994 508.600006 385.600006 2453.800049 593.299988
2014-07-31 222.5 497.5 388 2510 620.099976
2014-08-31 247.199997 502.174988 398.950012 2804 627.099976
2014-09-30 272.100006 471.799988 375.600006 3048 630 Variance Covariance Matrix
2014-10-31 284 502 442 3330 660.900024
2014-11-30 310.190002 494.5 484.399994 3341 753.950012 BATA MARUTI
2014-12-31 348.394989 443.149994 502.649994 3320.25 751.099976 BATA 38641843.62 12213622.05
2015-01-31 409.899994 458.024994 586 3647.350098 850 MARUTI 12213622.05 4261638.813
2015-02-28 439.049988 434.5 630 3648.100098 823.799988
2015-03-31 415.799988 412.450012 557.700012 3699.949951 810
2015-04-30 404.429993 431.174988 567.799988 3725.850098 762.450012
2015-05-31 428 440 586.900024 3785.899902 787.799988
2015-06-30 545 500.5 558.799988 4034.899902 757.450012
2015-07-31 552.48999 500.5 576 4380 880
2015-08-31 502.119995 426.950012 500 4170 844
2015-09-30 514 436.975006 500 4720 845.799988
2015-10-31 523.299988 474.5 477.799988 4470 831
2015-11-30 551.5 482 471 4609 843
2015-12-31 601.609985 504.899994 449.75 4621 882
2016-01-31 606.700012 519.974976 410 4100.899902 874.200012
2016-02-29 596.02002 482.350006 380.100006 3200.899902 852.599976
2016-03-31 693.900024 519.549988 440.899994 3700.449951 871
2016-04-30 687.400024 489.5 474.350006 3799.899902 864
2016-05-31 752.799988 478.975006 524.849976 4170.700195 989.049988
2016-06-30 805 486.375 535.799988 4188.600098 1002.799988
2016-07-31 1046 509 546.25 4798.950195 1119.599976
2016-08-31 1103.050049 526.5 597.049988 5074 1159.849976
2016-09-30 1069 543.5 542.950012 5661 1170
2016-10-31 1087 525.650024 488.049988 5919 1077.099976
2016-11-30 926 500 474 5266 967
2016-12-31 852 542 451.399994 5320.049805 893
2017-01-31 1039 523.049988 467.75 5900 970.700012
2017-02-28 1120 620.049988 511 5960 1030
2017-03-31 1170.050049 671 495.700012 6095 1074.699951
2017-04-30 1276.199951 697.599976 509.649994 6524.850098 1120.449951
2017-05-31 1334 666.349976 512.150024 7242 1150
2017-06-30 1380 694.099976 517.099976 7238.899902 1107
2017-07-31 1709.900024 811.375 518.200012 7759.899902 1162
2017-08-31 1790 799.924988 502 7747.5 1174.199951
2017-09-30 1838.050049 780.900024 509.149994 7978.200195 1131.699951
2017-10-31 1809.599976 947.75 524.950012 8251 1185
2017-11-30 1737 924.450012 539.400024 8660 1147.199951
2017-12-31 1759.5 922.700012 563.799988 9749 1163
2018-01-31 1681.800049 963.25 593.599976 9545 1126
2018-02-28 1635 949.75 524 8874 1120
2018-03-31 1769 893 506.75 8990 1120.400024
2018-04-30 1907.699951 963.299988 517.299988 8814.950195 1201.699951
2018-05-31 2120 920 543 8610 1307
2018-06-30 2300 972.349976 510.75 8878 1266.5
2018-07-31 2715 1190.400024 550.5 9535 1458
2018-08-31 2880 1245 655.450012 9100 1384
2018-09-30 2168 1257.699951 615.099976 7354 1299
2018-10-31 2391.449951 1067.900024 582.049988 6648.950195 1233
2018-11-30 2548 1174.900024 632 7688.5 1345
2018-12-31 2645 1125.25 621.900024 7449.75 1373.199951
2019-01-31 2575 1234 720.75 6679 1412.400024
2019-02-08 2670 1284.800049 727 7270 1468

Averages 1126.156886 675.7336056 508.0580324 5537.935255 982.8335992

ANS: The minimum variance portfolio has weights of HDFC and BATA as -0.430389730977251 (short) and 1.430389730977251
respectively

Date HDFC BATA RETURN HDFC RETURN BATA MVec Expected Return Variance
2014-02-28 157.895004 400.049988 1 0.05233053726 839186.8847
2014-03-31 179 468 0.1336647485 0.1698538034 2.78E-16
2014-04-30 186.990005 467.899994 0.04463689944 -0.0002136880342
2014-05-31 203.580002 537.375 0.08872130358 0.1484825965
2014-06-30 202.399994 508.600006 -0.005796286415-0.05354732542 SUM MVec Target Return
2014-07-31 222.5 497.5 0.09930833298 -0.02182462813 1 0.05233053726
2014-08-31 247.199997 502.174988 0.1110112225 0.009396960804
2014-09-30 272.100006 471.799988 0.100728193 -0.06048688351
2014-10-31 284 502 0.04373389834 0.06401020087
2014-11-30 310.190002 494.5 0.0922183169 -0.01494023904
2014-12-31 348.394989 443.149994 0.1231664037 -0.103842277
2015-01-31 409.899994 458.024994 0.1765381448 0.03356651292
2015-02-28 439.049988 434.5 0.07111489248 -0.0513618128
2015-03-31 415.799988 412.450012 -0.05295524572 -0.05074795857
2015-04-30 404.429993 431.174988 -0.02734486611 0.04539938285
2015-05-31 428 440 0.05827957226 0.02046735605
2015-06-30 545 500.5 0.273364486 0.1375
2015-07-31 552.48999 500.5 0.01374310092 0
2015-08-31 502.119995 426.950012 -0.09116906353 -0.146953023
2015-09-30 514 436.975006 0.02365969314 0.02348048652
2015-10-31 523.299988 474.5 0.01809336187 0.08587446304
2015-11-30 551.5 482 0.05388880689 0.0158061117
2015-12-31 601.609985 504.899994 0.0908612602 0.047510361
2016-01-31 606.700012 519.974976 0.008460675732 0.02985736221
2016-02-29 596.02002 482.350006 -0.01760341485 -0.07235919369
2016-03-31 693.900024 519.549988 0.1642226783 0.0771223832
2016-04-30 687.400024 489.5 -0.009367343674-0.05783849234
2016-05-31 752.799988 478.975006 0.09514105574 -0.02150151992
2016-06-30 805 486.375 0.06934114351 0.0154496454
2016-07-31 1046 509 0.299378882 0.04651760473
2016-08-31 1103.050049 526.5 0.05454115583 0.03438113949
2016-09-30 1069 543.5 -0.03086899731 0.03228869896
2016-10-31 1087 525.650024 0.01683816651 -0.03284264213
2016-11-30 926 500 -0.1481140754 -0.04879677129
2016-12-31 852 542 -0.07991360691 0.084
2017-01-31 1039 523.049988 0.2194835681 -0.03496312177
2017-02-28 1120 620.049988 0.07795957652 0.185450726
2017-03-31 1170.050049 671 0.04468754375 0.08217081362
2017-04-30 1276.199951 697.599976 0.09072253114 0.03964228912
2017-05-31 1334 666.349976 0.04529074692 -0.0447964465
2017-06-30 1380 694.099976 0.03448275862 0.04164478277
2017-07-31 1709.900024 811.375 0.2390579884 0.1689598445
2017-08-31 1790 799.924988 0.04684483003 -0.01411186196
2017-09-30 1838.050049 780.900024 0.02684360279 -0.02378343505
2017-10-31 1809.599976 947.75 -0.01547839952 0.213663684
2017-11-30 1737 924.450012 -0.04011935066 -0.02458452968
2017-12-31 1759.5 922.700012 0.01295336788 -0.001893017445
2018-01-31 1681.800049 963.25 -0.04416024496 0.04394709816
2018-02-28 1635 949.75 -0.02782735619 -0.01401505321
2018-03-31 1769 893 0.08195718654 -0.05975256646
2018-04-30 1907.699951 963.299988 0.07840585133 0.07872339082
2018-05-31 2120 920 0.1112858701 -0.04494964034
2018-06-30 2300 972.349976 0.08490566038 0.05690214783
2018-07-31 2715 1190.400024 0.1804347826 0.224250582
2018-08-31 2880 1245 0.06077348066 0.0458669144
2018-09-30 2168 1257.699951 -0.2472222222 0.01020076386
2018-10-31 2391.449951 1067.900024 0.1030673206 -0.1509103398
2018-11-30 2548 1174.900024 0.06546239821 0.1001966454
2018-12-31 2645 1125.25 0.03806907378 -0.04225893522
2019-01-31 2575 1234 -0.02646502836 0.09664518996
2019-02-08 2670 1284.800049 0.03689320388 0.0411669765

Averages 1126.156886 675.7336056 0.05233053726 0.02261869193

alpha 1-alpha E[Rp,z] SD[Rp,z] z_HDFC z_BATA

1 0 7.49E-02 0.2781 -0.430389731 1.43E+00
0.9 0.1 6.74E-02 0.3015 -0.2873507579 1.29E+00
0.8 0.2 5.99E-02 0.3512 -0.1443117848 1.14E+00
0.7 0.3 5.24E-02 0.2987 -0.001272811684 1.00E+00
0.6 0.4 4.49E-02 0.3222 0.1417661614 8.58E-01
0.5 0.5 3.74E-02 0.2944 0.2848051345 7.15E-01
0.4 0.6 2.99E-02 0.3345 0.4278441076 5.72E-01
0.3 0.7 2.25E-02 0.3674 0.5708830807 4.29E-01
0.2 0.8 1.50E-02 0.33 0.7139220538 2.86E-01
0.1 0.9 7.49E-03 0.2715 0.8569610269 1.43E-01
0 1 1.45E-17 0.374 1 2.78E-16
-0.1 1.1 -7.49E-03 0.264 1.143038973 -1.43E-01
-0.2 1.2 -1.50E-02 0.315 1.286077946 -2.86E-01
-0.3 1.3 -2.25E-02 0.3169 1.429116919 -4.29E-01
-0.4 1.4 -2.99E-02 0.3278 1.572155892 -5.72E-01
-0.5 1.5 -3.74E-02 0.284 1.715194865 -7.15E-01
-0.6 1.6 -4.49E-02 0.3648 1.858233839 -8.58E-01
-0.7 1.7 -5.24E-02 0.2765 2.001272812 -1.00E+00
-0.8 1.8 -5.99E-02 0.367 2.144311785 -1.14E+00
-0.9 1.9 -6.74E-02 0.259 2.287350758 -1.29E+00
-1 2 -7.49E-02 0.3412 2.430389731 -1.43E+00
Part (B)
Date HDFC BATA ASIANPAINT MARUTI AXISBANK MVec Variance
2014-02-28 157.895004 400.049988 252 1582 471.5 -0.3260787239 32796.6915
2014-03-31 179 468 294 1976 547.75 0.5841389259
2014-04-30 186.990005 467.899994 303.440002 1923 505.149994 0.2741081101
2014-05-31 203.580002 537.375 366.450012 2270 504.350006 -0.006713929078
2014-06-30 202.399994 508.600006 385.600006 2453.800049 593.299988 0.4745456171
2014-07-31 222.5 497.5 388 2510 620.099976
2014-08-31 247.199997 502.174988 398.950012 2804 627.099976 SUM of MVec
2014-09-30 272.100006 471.799988 375.600006 3048 630 1
2014-10-31 284 502 442 3330 660.900024
2014-11-30 310.190002 494.5 484.399994 3341 753.950012
2014-12-31 348.394989 443.149994 502.649994 3320.25 751.099976
2015-01-31 409.899994 458.024994 586 3647.350098 850
2015-02-28 439.049988 434.5 630 3648.100098 823.799988
2015-03-31 415.799988 412.450012 557.700012 3699.949951 810
2015-04-30 404.429993 431.174988 567.799988 3725.850098 762.450012
2015-05-31 428 440 586.900024 3785.899902 787.799988
2015-06-30 545 500.5 558.799988 4034.899902 757.450012
2015-07-31 552.48999 500.5 576 4380 880
2015-08-31 502.119995 426.950012 500 4170 844
2015-09-30 514 436.975006 500 4720 845.799988
2015-10-31 523.299988 474.5 477.799988 4470 831
2015-11-30 551.5 482 471 4609 843
2015-12-31 601.609985 504.899994 449.75 4621 882
2016-01-31 606.700012 519.974976 410 4100.899902 874.200012
2016-02-29 596.02002 482.350006 380.100006 3200.899902 852.599976
2016-03-31 693.900024 519.549988 440.899994 3700.449951 871
2016-04-30 687.400024 489.5 474.350006 3799.899902 864
2016-05-31 752.799988 478.975006 524.849976 4170.700195 989.049988
2016-06-30 805 486.375 535.799988 4188.600098 1002.799988
2016-07-31 1046 509 546.25 4798.950195 1119.599976
2016-08-31 1103.050049 526.5 597.049988 5074 1159.849976
2016-09-30 1069 543.5 542.950012 5661 1170
2016-10-31 1087 525.650024 488.049988 5919 1077.099976
2016-11-30 926 500 474 5266 967
2016-12-31 852 542 451.399994 5320.049805 893
2017-01-31 1039 523.049988 467.75 5900 970.700012
2017-02-28 1120 620.049988 511 5960 1030
2017-03-31 1170.050049 671 495.700012 6095 1074.699951
2017-04-30 1276.199951 697.599976 509.649994 6524.850098 1120.449951
2017-05-31 1334 666.349976 512.150024 7242 1150
2017-06-30 1380 694.099976 517.099976 7238.899902 1107
2017-07-31 1709.900024 811.375 518.200012 7759.899902 1162
2017-08-31 1790 799.924988 502 7747.5 1174.199951
2017-09-30 1838.050049 780.900024 509.149994 7978.200195 1131.699951
2017-10-31 1809.599976 947.75 524.950012 8251 1185
2017-11-30 1737 924.450012 539.400024 8660 1147.199951
2017-12-31 1759.5 922.700012 563.799988 9749 1163
2018-01-31 1681.800049 963.25 593.599976 9545 1126
2018-02-28 1635 949.75 524 8874 1120
2018-03-31 1769 893 506.75 8990 1120.400024
2018-04-30 1907.699951 963.299988 517.299988 8814.950195 1201.699951
2018-05-31 2120 920 543 8610 1307
2018-06-30 2300 972.349976 510.75 8878 1266.5
2018-07-31 2715 1190.400024 550.5 9535 1458
2018-08-31 2880 1245 655.450012 9100 1384
2018-09-30 2168 1257.699951 615.099976 7354 1299
2018-10-31 2391.449951 1067.900024 582.049988 6648.950195 1233
2018-11-30 2548 1174.900024 632 7688.5 1345
2018-12-31 2645 1125.25 621.900024 7449.75 1373.199951
2019-01-31 2575 1234 720.75 6679 1412.400024
2019-02-08 2670 1284.800049 727 7270 1468

Averages 1126.156886 675.7336056 508.0580324 5537.935255 982.8335992

Variance Covariance Matrix

HDFC BATA ASIANPAINT MARUTI AXISBANK

HDFC 7728368.724 2442724.411 577317.7987 19702099.41 2317994.047
BATA 2442724.411 852327.7625 174444.2423 6036245.988 683073.8004
AXISBANK 577317.7987 174444.2423 101723.9374 1468818.506 213101.2383
MARUTI 19702099.41 6036245.988 1468818.506 63559421.49 6227734.944
ASIANPAINT 2317994.047 683073.8004 213101.2383 6227734.944 786088.8855

ANSWER Optimal portfolio weights are: -0.3260787239

0.5841389259
0.2741081101
-0.006713929078
0.4745456171