Homework 1

Homework consists of the quiz part (66% weight) and the Excel part (33% weight).
Check homework deadline on Canvas; late submissions wont be accepted. Well have six
assignments. You can fail one out of six only five best homework scores will be considered for
the final score.
The quiz part should be completed at the course Canvas website. Homework will be
assigned, completed, and graded electronically through Canvas. The assignment contains 17
multi-choice questions and you have two attempts (no penalty). Homework solution will be
available on Canvas after the deadline. I strongly encourage you to read the textbook (Ch. 5 and
7) before starting the assignment. Some questions are extensively discussed in the book but are
not covered in the slides.
The Excel part requires you to solve a problem in MS Excel or comparable software
(e.g. OpenOffice). Please upload your Excel solution to Canvas before the deadline. Please
name the file as HW1_YourLastName_YourFirstName.FileExtension. If you are new to
Excel, I added several tutorials to the homework folder on Canvas.
For the first assignment, you will use the file Portfolio Example.xls, which we
discussed in class and which is available from courses Canvas website. In this assignment, you
will learn how to compute basic statistics in Excel (average, variance, correlation) for individual
stocks and their portfolios.
In short, you will add the third stock to the two stocks (Exxon and Coke) that are already
in the file. Here are the step-by-step instructions (check the footnotes for additional help):
1. Download monthly stock price data for your favorite stock (should have at least three
years of data). Go to the yahoo finance webpage of your favorite stock
(http://finance.yahoo.com/ 1). Click on the tab Historical Prices on the left. Select
Monthly time period and push the Get Prices button. Scroll down and click on
Download to Spreadsheet to download a .csv file with data. Open the file in Excel.
Create a new Excel Sheet in the main file and call it Stock. Copy the data from the
csv file to Stock.
2. Compute monthly returns for Your Stock. Use the prices reported in Adj Close
column2. Take the value from the current month and divide it by the previous months
price; subtract one to get a holding period return3. Apply the formula to all months by
Dragging the Fill handle4. Copy values for the returns to Main sheet5. Check that
the dates align properly January return should be in the January row of Main. At
1

You will need to search for stocks name. E.g. http://finance.yahoo.com/q?s=NICE

Its the end-of-the-period price that is adjusted for dividends paid during the period.
3
E.g. G2/G3-1
4
If you dont know how to do this, look here
http://www.extendoffice.com/documents/excel/867-excel-apply-formula-to-entire-columnrow.html
5
Right Click->Paste Special -> As Values
2

the end of this step, Main will contain four columns of data: Date, Exxon, Coke,
and Your Stock.
3. Compute average return and standard deviation (based on monthly returns) for Your
Stock as well as its correlation with Exxon and Coke. I used Excel functions
AVERAGE(), STDEV(), and CORREL() to do this step for Exxon and Coke.
4. Consider a portfolio of Your Stock, Exxon, and Coke with weights 50%, 30%, and
20% respectively. Compute portfolios expected return and standard deviation with
two methods.
a. Method 1. Use formulas for the expectation and variance of the sum of three
random variables:
E rp wA E rA wB E rB wC E rC

p2 w2A A2 wB2 B2 wC2 C2

2 wA wBCov rA , rB 2 wA wC Cov rA , rC 2 wB wC Cov rB , rC

Dont forget to take square root to get from variance to volatility.

a. Method 2. Use formulas for the expectation and variance of the sum of three
random variables: compute returns for the portfolio for each month; then
compute average and standard deviation as if it were a stock. You can create a
separate column for monthly portfolio returns.6
5. Compare the results for Methods 1 and 2. Explain why the numbers differ or are the
same.7
Congratulations! Youve mastered how to compute risk and return in practice using Excel.

Array Formulas is a cooler way to solve the problem. I use array formulas in Method2
column. If you enter an array formula in a cell, dont forget to press <Ctrl> + <Shift> +
<Enter> at the end. Its Ok to implement only one of these two ways to solve Method 2. See
ExcelMatrix.pdf for details.
7
Hint: you may want to check that the time period is the same for all three stocks (e.g. 1983
to 2012).