Project 4 Finding 401k Plan

In: Business and Management

Submitted By Atticus
Words 496
Pages 2
For this project, you are going to evaluate the systematic risk of an investment portfolio. It can be an imaginary portfolio that you would like to put together to park your retirement savings, or your real 401(k) portfolio.
To simplify the project, we are not going to include bonds, ETFs, mutual funds, etc. Or in other words, we are going to investigate a portfolio composed of only stocks. For example, your ideal portfolio can comprise the following stocks: IBM (5%), APPL (5%), GOOG (10%), DIS (10%), C (5%), WMT (20%), ALM (5%), GM (10%), JNJ (10%), GE (5%), KFT (5%), MCD (10%). Note the weights in the parenthesis (percentage of total funding) have to add up to 100%. Your portfolio may include more stocks than this example because it normally takes more than 30 stocks (Statman, 1987) for a portfolio to be qualified as a well diversified portfolio.
Beta measures the systematic risk (non-diversifiable risk) of a stock. Mysterious as it may sound, it can be easily found out by regressing the stock’s monthly excess return (return in excess of risk free rate) on market monthly excess return according to the following model:
R_it-R_ft=α_i+β_i (R_mt-R_ft )+e_it Equivalently Equivalently the dependent variable Y the independently variable X

where,
R_it is the return of stock i on month t;
R_ft is the risk free return on month t, normally a 3-month treasury bill serves a good proxy;
R_mt is the market return on month t, normally S&P 500 return serves a good proxy; β_i is the beta for stock i; α_i is the intercept for stock i; e_it is the error term.
To find the beta for stock i, you need to obtain the data of R_it-R_ft as dependent variable Y and R_mt-R_ft as the independent variable X. beta is simply the regression coefficient.
After you find beta for each individual stock i, the portfolio beta is simply β_p=∑_(i=1)^n▒w_i β_i where w_i is…...

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