Question 2

Solution
Monthly Returns of DJIA Index
YEAR 2014 2015 2016
MONTH
January -0.056 -0.038 -0.057
February 0.038 0.053 0.004
March 0.008 -0.020 0.064
April 0.007 0.004 0.006
May 0.012 0.008 0.000
June 0.007 -0.023 0.010
July -0.016 0.003 0.028
August 0.031 -0.071 -0.002
September -0.003 -0.015 -0.005
October 0.020 0.078 -0.008
November 0.025 0.003 0.050
December 0.000 -0.017 0.029
Question 4

Solution
Mean
mean is called expected monthly returns
which is calculated by the sumation of probalities multiplied by monthly returns

Mean of Monthly returns

YEAR 2014 2015 2016
MONTH
January -0.0278 -0.0483 -0.0285
February 0.0191 0.0265 0.8337
March 0.0041 -0.0101 0.0322
April 0.0037 0.0017 0.0031
May 0.0059 0.0042 0.9999
June 0.0032 -0.0113 0.0049
July -0.0080 0.0017 0.0138
August 0.0157 -0.0354 -0.0009
September -0.0016 -0.0075 -0.0024
October 0.0221 0.0392 -0.0038
November 0.0123 0.0013 0.0252
December -0.0001 -0.0085 0.0144
Total 0.0485 -0.0462 1.8916

Standard Deviation
square root of summation return less expected return squared times probability
Standard deviation of Monthly Return Indices
YEAR 2014 2015 2016
MONTH
January 0.0902 0.0030 0.0082
February 0.0055 0.0076 0.2395
March 0.0000 0.0029 0.0092
April 0.0010 0.0007 0.0008
May 0.0018 0.0011 0.2886
June 0.0011 0.0034 0.0015
July 0.0023 0.0004 0.0041
August 0.0044 0.0103 0.0003
September 0.0004 0.0022 0.0008
October 0.0006 0.0112 0.0012
November 0.0037 0.0005 0.0072
December 0.0054 0.0025 0.0042
Total 0.1163 0.0456 0.5656
5 random stocks from the DJIA
a. compute the mean monthly returns
weight will be equal 20% for each stock
Random stocks selected are 2, 9, 14, 21 and 28
mean = 0.218

The standard deviation

Standard deviation is calculated as square root of summation return less expected return squared times probability
= 0.340776

Stocks 10, 15, 20, and 25

b. compute the mean monthly returns
weight will be equal 25% for each stock
mean = -0.04

The standard deviation

Standard deviation is calculated as square root of summation return less expected return squared times probability
= 0.23785
red times probability

red times probability

Tracking errors

TE =
√(∑(Rp-Rb)₂
√(N-1)

tE= Tracking Error

Rp= Return Fund
Rb= Return Benchmark
N= Number of periods

portfolio 10
TE= 0.0606

portfolio 15
TE= 0.0177

portfolio 20
TE= 0.2722

portfolio 25
TE= 0.2051
Representation of tracking error for return and risk in a graph

Tracking Errors portfolio size

30.0000
0.0606 10

25.0000

0.0177 15
20.0000

0.2722 20 15.0000

10.0000
0.2051 25

5.0000

0.0000
1 2 3 4
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