The Polypropylene Is a Polymer

In order to construct a diversified portfolio, we need to choose two companies that are different from Apple and Dell. It means that these two companies should be in different industry area from computer industry, in which Apple and Dell are. We chose Nike and Home Depot's stocks to diversify our portfolio. Nike is a Multinational Corporation that is engaged in the design, development and worldwide marketing and selling of footwear, apparel, equipment, accessories and services; Home Depot is in manufacture industry, which is mainly producing home improvement and construction products. Nike is a worldwide company; Home Depot also has business around world. Therefore, these two companies must have high-expected return on market. Due to all these reasons, Nike and Home Depot are two diversifying companies for Apple and Dell.

After we download the data from Yahoo Finance, we use the adjusted month-end closing prices to calculate monthly-expected return, excess return, and mean and standard deviation for these two companies. Than we use same CAPM analysis as in the previous section to obtain the regression statistic and beta statistic, and to include these estimates in SML graph for Apple and Dell. From SML chart, we can clear see the firm-specific return and betas. Home Depot and Nike have second and third high-expected return.

To get a clear view of diversified portfolio, we construct the efficient frontier and the best capital allocation line (CAL) based on index model.

1. Constructing the input list:

In this step, there are two tables needed: excess returns, which contains annualized excess return, annualized standard deviation, and sharp ratio of four companies and S&P 500; and covariance matrix, which contains beta and covariance of four companies. The covariance is calculated based on Single-Index Model. By having covariance, correlation coefficient between each company is easy to calculate: r = Cov(X,Y)/σxσy. The correlation coefficient between each companies are smaller than 0.5. It means that the two companies of chosen are diversifying companies.

2. Efficient Frontier:

Based on the input list, we can construct the efficient frontier by using Excel Solver. The twenty points is including the minimum variance portfolio, the optimal portfolio, and a sequence of other points on the efficient frontier. The minimum variance is constructed by minimize standard deviation, and set the sum of weights equal to one; the optimal portfolio is calculated by maximize sharp ratio and set the sum of weights equal to one. Than, using the standard deviation of each point multiply by the sharp ratio of the optimal portfolio to calculate the capital allocation line.

3. Graph of efficient frontier and CAL:

Finally, to get a clear view of the diversified portfolio, we draw a scatter

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