Seminar in Finance

EXERCISE 3 Creating a portfolio (port.xls):

In this exercise, you are given actual stock price data from an actual portfolio. I used to update these data every semester, but I’d usually make a little error or two in the update, so you get an old data set that I’m fairly confident is clean. You are to use the raw pps data (tier1) to generate market values (tier2) and daily returns (tier3). The three tiers together make a portfolio spreadsheet that we’ll call port.xls. The daily returns data will be used in subsequent exercises to illustrate portfolio management concepts. Note: Prices have been adjusted for stock splits. Dividends are ignored. Market data (last column) is the S&P500 Index

There are a couple of old screen shots (videos called Tier2 and Tier3) posted to the Moodle website. You might find these helpful in visualizing the operations that you are being asked to perform, but be aware that the data sets in the screen shots are different than your data set.

A sample structure of port.xls can be seen in sample3. Your port.xls will be much larger than the sample. The old symbol for market data shown in sample3 is ^SPX whereas the current symbol for the S&P500 is ^GSPC.

1. Open the Excel spreadsheet file called "portmaster.xls". 1.5 Overwrite cell A1 with your name. 2. Save a copy to your local drive. This first block of data (approximately 250 trading days times 30 firms) is called “tier1”. The data comes from finance.yahoo.com, Historical Prices. Hint: As you build your formulas, you might try testing them in “sample3” to see if they work (i.e. see if you get the same results as in the sample)

3. Build a second block of data (tier2, market values) directly and immediately below tier1. Start by copying all the dates from tier1 into tier2 [I now notice that this has already been done for you]. Next, calculate the market value (pps x number of shares) for every day for every firm. Only do this for the firms (not for the total portfolio or for the market index). Your formula should look roughly like “=C$3*C4” where C3 is the “no of shares” and “C4 is the “pps”. The dollar sign ($) in C$3 will hold the row constant at row 3 as you copy the formula down and across for every day and every firm.

4. Next, calculate the market value of the portfolio (col. B) = the sum of all the stocks' market values. Note: The S&P500 data [^GSPC] should be copied from tier1 into tier2. This market data is being shown for comparison and is not part of the portfolio.

5. Build a third block of data (tier3, daily returns) directly and immediately below tier2. Again, make sure that you have the dates in Column A. Calculate the daily returns for every stock for every day (except for the first day). Use the basic model of (new-old)/old. [What happens if you use new-old/old?]. You cannot calculate a return for Day1 because you don't have the data for Day0. The first daily return should be in Day2 and the formula should be =(day2 daily return minus day1 daily return) divided by (day1 daily return). But in your formula, use cell designations. Write the formula once, then copy it to all days and all firms. Also, calculate these daily returns for the portfolio and for the S&P500 index (this needn't be an extra step – you can calculate daily returns for the portfolio, all the firms, and the market all in one copy- formula operation.

5) Calculate Standard Deviation using the Excel function =STDEVP on the daily returns for each stock, for the portfolio, and for the S&P 500. Place these data in a row under tier3 (see the sample3 for an example). Caveat: There is a difference between “standard deviation using a sample” [=STDEV( )] and “standard deviation using the entire population of data” [=STDEVP( )]. Use STDEVP.

6) Calculate total annual returns by using “(lastday marketvalue – firstday marketvalue)/firstday marketvalue” to calculate total annual returns for each stock, for the portfolio, and for the S&P 500. Place these data immediately under the standard deviation data. In the sample3 the total returns are only for six days. In your port.xls, the total returns are for a year.

7) Send your port.xls through Moodle “port.xls” assignment link, the same way you've been sending previous assignments.