Obtain monthly adjusted closing prices of Amazon (AMZN) and Facebook (FB) stocks for 01/01/2013-12/31/2017 from YahooFinance! to do the following:
1. Calculate the monthly log returns of each stock.
2. Find the monthly average return, return variance and standard deviation of each stock.
3. Find the annual average return, return variance and standard deviation of each stock.
4. Find the correlation coefficient of the two stocks.
5. Consider forming portfolios with these two assets. Let the weight of AMZN in the portfolio vary and take values between 0%-100% with increments of 5%. In other words, the weight of AMZN can be 0%, 5%, 10%,…..95%,100%. The weight of FB is simply 100% minus weight of AMZN. Calculate the annual average return, return variance and standard deviation of portfolios for all possible weights.
6. Plot annual average return versus annual standard deviation values that you find in 5 to get the “feasible set” with these two stocks. Note: The average return should be y-axis and standard deviation should be x-axis.
7. Can all the portfolios on the “feasible set” be chosen by the investors? Why/ Why not? Which portion of the “feasible set” is the “efficient frontier”? answer in a text box.
8. How does the correlation between AMZN and FB effect the shape of the “feasible set”? For example, how would it look like if the two stocks were perfectly positively correlated (i.e. ρ=1) or how would it look like if they were perfectly negatively correlated (i.e. ρ=-1)? When do we have no diversification benefits? When do we have the maximum diversification benefits? answer in a text box.