How to construct Efficient Frontier using real data

How to construct Efficient Frontier using real data

 

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Choose two stocks from FTSE100 and download their monthly stock prices for the last year.

If stock prices are downloaded from Bloomberg terminal, remember to use book a terminal prior to logging in. Please bear in mind penalty for unauthorized use of the terminal without allocated booking time.

 

 

Export the data in excel file.

Calculate the return of the stocks [e.g., (price today/price yesterday)-1]. Format the return to express in terms of percentage.

Now, calculate the mean, variance, standard deviation, covariance, and correlation. To calculate all these indicators in excel you need to type in = sign in a cell and then type in a function (covariance, etc).

 

Homework

You should choose different stocks from FTSE100 to construct your portfolio and the Efficient Frontier.

You should construct the EF and be able to properly interpret the graph. Address the following two questions:

1. Identify the combination of these two stocks that provide you with the maximum portfolio return for the least possible risk.

2. Identify the area that we call efficient frontier, and why would you suggest someone invest only on that portion of the frontier?

 

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