Question

Use weighted average cost (WAC) for the following:

Select 5 stocks (ones assigned from question 1) and create a portfolio using the weignted average cost methoa. Ignore alvidenas or stOck splits.
You have a budget of $200,500 and you are buying for today's date and return.
Collect and assign the following information for each equity:
a) Equity Name. Ticker. Date. price. 10-vear annualized return 15 marks
b) What is the allocation per each equity in terms of dollars (assign your weights)?
c) Create 2 portrolios. which portrolio has a higher return ? Support vour answer using
details.

Answer 1

The construction of a portfolio using WAC involves selecting stocks, allocating funds based on assigned weights, and comparing the expected returns of different portfolios. The safest investment is usually the one with less volatility, while the riskiest has high variability in returns. Portfolio diversification is crucial to balance risk and return.

Step-by-step explanation:

Constructing a portfolio using the Weighted Average Cost (WAC) method involves selecting stocks and assigning weights to each investment based on the total budget. Here is a simplified process:

Select five stocks with assigned values including Equity Name, Ticker, Date, Price, and 10-year annualized return.

Determine the dollar allocation for each equity, which requires assigning weights. For instance, if you have a $200,500 budget, you might allocate this in various proportions according to the desired strategy (e.g., 20%, 20%, 20%, 20%, 20%).

Create two portfolios by varying the weights of each stock to compare their expected returns.

To evaluate which portfolio has the higher return, calculate the expected return for each based on the allocated weights. Typically, the portfolio with higher weights in stocks with larger 10-year annualized returns would exhibit a higher expected return. However, it's important to consider the risk as well: higher returns often come with higher risk.

Example Calculation

If Stock A has a 10-year annualized return of 8% and is allocated 20% of the portfolio (equating to $40,100), its contribution to the portfolio's expected return would be 1.6% (8% * 20%). Summing these contributions for all stocks gives an overall portfolio expected return.

The safest investment is typically the one with the lowest standard deviation or variance in returns, indicating less volatility. On the contrary, the investment with the highest variability in returns is considered the riskiest. To assess safety and risk, an investor might look at historical price movements, standard deviations, or financial fundamentals.

Remember, while constructing portfolios, diversification is key to minimizing risk while maintaining desired returns, hence why varying weights in a portfolio is considered to be a fundamental strategy in investment management.