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1.

Using the past 10 years of annual report data for the S & P CNX Nifty index and the
CNX Bank index calculate the mean, standard deviation and covariance/correlations for
each asset class. Estimate the portfolio risk and return for Kausheshs existing portfolio.

Year S&P CNX (Rt E(R))2 S&P BANK (Rt E(R))2 (RX,t E(RX)) (RY,t E(RY))
NIFTY INDEX INDEX

2003 72% (0.72-0.259)2 110% (1.10.356)2 (0.72-0.259)(1.10.356)

2004 10% (0.1-0.259)2 33% (0.330.356)2 (0.1-0.259)(0.330.356)

2005 38% (0.38-0.259)2 33% (0.330.356)2 (0.38-0.259)(0.330.356)

2006 41% (0.41-0.259)2 33% (0.330.356)2 (0.41-0.259)(0.330.356)

2007 53% (0.53-0.259)2 63% (0.630.356)2 (0.53-0.259)(0.630.356)

2008 -51% (-0.51-0.259)2 -49% (-0.490.356)2 (-0.51-0.259)(-0.49-0.356)

2009 74% (0.74-0.259)2 78% (0.780.356)2 (0.74-0.259)(0.780.356)

2010 18% (0.18-0.259)2 29% (0.290.356)2 (0.18-0.259)(0.290.356)

2011 -24% (-0.24-0.259)2 -31% (-0.310.356)2 (-0.24-0.259)(-0.31-0.356)

2012 28% (0.28-0.259)2 57% (0.570.356)2 (0.28-0.259)(0.570.356)

= 259/10 1.42709/10-1 =356/10 =2.01984/10-1 1.61086/10-1

25.9% 0.1586 35.6% 0.2244 0.1790

Mean Variance Mean Variance Covariance

0.3982 0.4737

Std Deviation Sample Correlation=0.1790/0.398


2*0.4737
Std Dev
=0.9450

Sample data T

2 ( Rt E ( R)) 2 (T 1)
t 1

S & P CNX Nifty TOTAL MEAN VARIANCE STANDARD DEVIATION


Index 259 25.9 1585.66 39.82

For S & P CNX Nifty Index, the mean is 25.9 with variance and Standard deviation
1585.66 and 39.82 respectively.
TOTAL MEAN VARIANCE STANDARD DEVIATION
CNX BANK Index 356 35.60 2244.27 47.37

For CNX Bank Index, the mean is 35.6, with the variance is 2244.27 and the
standard deviation is 47.37.
From the table above, we calculated the covariance for S&P Nifty Index and CNX
Bank index is 0.1790.

Expected return portfolio:

E(Rp) = (0.6*0.259) + (0.4*0.356)

= 29.78%

Variance portfolio:

Before addition of new asset class, the average portfolio return is 29.78% and the portfolio
standard deviation is 42.31%.
2. After adding a new asset class (gold), the portfolio return average is 27.37% and
portfolio risk is 32.92%. Compare to the portfolio before adding new asset class
(gold), that having average portfolio return of 29.78% and standard deviation of
42.30% which is higher than portfolio after adding a new asset class (gold).

Year Gold (Rt E(R))2 (RX,t E(RX)) (RY,t E(RY)) (RX,t E(RX)) (RY,t E(RY))

2003 17% (0.17-0.187)2 (0.72-0.259) (0.17-0.187) (1.10.356) (0.17-0.187)

2004 13% (0.13-0.187)2 (0.1-0.259)( 0.13-0.187) (0.330.356) (0.13-0.187)

2005 9% (0.09-0.187)2 (0.38-0.259)(0.09-0.187) (0.330.356) (0.09-0.187)

2006 36% (0.36-0.187)2 (0.41-0.259)(0.36-0.187) (0.330.356) (0.36-0.187)

2007 15% (0.15-0.187)2 (0.53-0.259)(0.15-0.187) (0.630.356) (0.15-0.187)

2008 25% (0.25-0.187)2 (-0.51-0.259)(0.25-0.187) (-0.49-0.356) (0.25-0.187)

2009 12% (0.12-0.187)2 (0.74-0.259)(0.12-0.187) (0.780.356) (0.12-0.187)

2010 26% (0.26-0.187)2 (0.18-0.259)(0.26-0.187) (0.290.356) (0.26-0.187)

2011 28% (0.28-0.187)2 (-0.24-0.259)(0.28-0.187) (-0.31-0.356) (0.28-0.187)

2012 6% (0.06-0.187)2 (0.28-0.259)(0.06-0.187) (0.570.356) (0.06-0.187)

= 187/10 0.08281/10-1 =-0.12993/10-1 -0.19892/10-1

18.7% 0.0092 =-0.0144 =-0.0221

Mean Variance Covariance Covariance

0.0960

Std Deviation Correlation= Correlation=-


0.0221/0.4737*0.0960
-0.0144/0.3982*0.0960
=-0.4860
=-0.3767

Sample data T

2 ( Rt E ( R)) 2 (T 1)
t 1
3. Estimate the Sharpe Ratio for the diversified portfolio (gold and equity) versus an
equity portfolio using the result from Question 1 and 2. Comment on the result obtained and
the implication they carry with regard to the significance of diversification.

Sharpe ratio E(p)


Question 1 (29.78% - 8.11%) / 18.22% 0.2978
= 1.1894
Question 2 (27.37% - 8.11%) / 25.32% 0.2737
= 0.7607

Hedge fund allocation to existing assets class is 60% (S&P CNX Nifty Index) and
40% (CNX Bank Index) in investment portfolio stock which has Sharpe Ratio 1.1894.
Sharpe Ratio greater than 1 is considered acceptable to good by investor. The new
portfolios allocation is 50% (S&P CNX Nifty Index), 30% (CNX Bank Index) and 20%
(Gold) has resulted decreasing in Sharpe Ratio which is 0.7607.