ECO 426 SUNY University at Buffalo Financial Economics Essay


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ECO 426: Financial Economics
Professor Monica Tran-Xuan
Spring 2021
Instructions: This project is designed to help you apply what you have learned about optimal
portfolio construction. You may use either Excel or Stata to complete the project. Regardless
of which software you use, you must document with images each step. Briefly explain your work
throughout the project: what is the purpose of the calculations you are doing? The main goal of
the project is for you to understand the theory behind optimal portfolio choice, as well as find good
data sources and become familiar with using statistical software.
Important: Your submissions should be in TWO files
• One report file (Word, PDF, etc.) that should look and read like a short paper. In particular,
it should have an Introduction section, a Data section, a Results section etc. The report should
include tables and graphs. Please do not treat this as a Problem Set.
• One data analysis file from the software that you used to generate your results (e.g., .xlsx
file for Excel, .do file for Stata, etc.)
Part II – Optimal Portfolio Construction
1. Using the estimates of expected returns, variances and covariances from part I, graph the
efficient frontier of the portfolio opportunity set using a software package.
2. Next, figure out the optimal weights we ought to place on each stock to form our optimal
risky portfolio. What is the expected return and variance of your optimal risky portfolio?
3. In the same graph as the efficient frontier, draw the Capital Allocation Line that goes through
the risk-free asset and the optimal risky portfolio.
4. In the same graph as the efficient frontier, fix a utility level and draw your indifference curve
that corresponds to that utility level. Draw multiple indifference curves until you draw the
one that is tangent to the Capital Allocation Line.
5. Recover the appropriate weights on the optimal risky portfolio and the risk-free asset that
correspond to the tangency between the indifference curve and the Capital Allocation Line.

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