Regression analysis

Investments Project

1 1 Go tohttp://yahoocom/”>financeyahoocom, download monthly Adj close prices (adjusted for dividend and stock split) from 12/1/2008 through 12/31/2011 for the following three country indexes

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2 Compute monthly holding period return using Adj close prices

3 Use the EXCEL statistical functions to compute mean (AVERAGE) and standard deviation of the monthly return for each index

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4 To achieve international diversification, John invests in the USA and India indexes What are the weights on the two indexes to achieve the optimal international portfolio? What are the mean and standard deviation of returns on his optimal international portfolio?[All calculations should be done

in EXCEL]

5 Mary instead invests in the USA and Korean indexes What are the weights on the two indexes to achieve the optimal international portfolio? What are the mean and standard deviation of returns on her optimal international portfolio?[All calculations should be done in EXCEL]

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6 Discuss whose optimal portfolio performs better (John or Mary), and explain why Also discuss potential reason(s) that causes the difference (At least a half or one page discussion, double space)

7 Answer the following question based on annualizedmean and standard deviation of returns

Some people argue that developing country stock market like India is much riskier than developed economy stock market, eg, Korea Based on your analysis, do you agree that from US investors’ point of view (eg, Mary and John mentioned above), Indian stock index is riskier than the Korean stock index? State your reasons why you agree or disagree Relate the discussion with your analysis as well as what you have learned from the class and the textbook (At least a half page discussion, double space)

Part II:

1 Download monthly Adj close prices (adjusted for dividend and stock split) from 12/1/2008 through 12/31/2011 for each stock

2 Compute monthly holding period return using Adj close prices

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3 Suppose we consider the USA S&P 500 index (^GSPC) as the market portfolio Estimate betas of DX and IP based on the index model regressions, and show your regression output (see chapter

7, page 203-206 of the textbook)

4 Based on the regression results, is there any arbitrage opportunity of trading the three securities, ^GSPC, DX and IP? Is the arbitrage opportunity reliable? And explain why? (At least a half page discussion, double space)

Solution: