In the New York Stock Exchange (NYSE), the common stocks of General Motors (GM) and Ford (F) are recorded historically below.
| Year | GM Common Stock Return | Ford Common Stock Return |
| 2003 | -10.00% | -3.00% |
| 2004 | +18.50% | +21.29% |
| 2005 | +36.87% | +44.25% |
| 2006 | +14.33% | +3.67% |
| 2007 | +33.00% | +28.30% |
As a capital-budgeting manager at NYSE, following calculations are made to advise the client
- Task 1 : Average rate of return of each stock individually
- Task 2 : If your client invested in a stock portfolio comprising 40% of GM common stocks and 60% of Ford common stocks, what would have been the rate of return on the asset portfolio each year
- Task 3: What would have been the average return on the portfolio during the period from 2003 to 2007
- Task 4: Estimate the (individual) risk of each stock
- Task 5: Calculate the risk for the asset portfolio (both common stocks taken together)
- Task 6 : What is the coefficient correlation between the returns of the two common stocks
Question :
Critically discuss in 400 words the modern portfolio theory, which was pioneered by Harry Markowitz, in relation to above findings(TASK 1 to TASK 6) and advise your client accordingly in layman’s terms on the profitability of your client’s asset portfolio.
Please check answers of TASK 1 to TASK 6 is in the attached excel sheet
Put reference in Harvard referencing style
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