CBO- iShares 1-5 Year Laddered Corporate Bond Index ETF- and XIU-iShares S&P/TSX 60 Index ETF- are two iShares ETFs tracking the Canadian bond market and Canadian equity market, respectively. Thus, they are popularly used by Canadian investors as proxies for Canadian bond and equity markets. You can find out the historical closing prices of CBO and XIU from the following website:
or any other source.
Download the most recent three years weekly data.
Suppose that now you have $80 million to invest for six months and you want to invest those money into CBO, XIU and the Canadian 6-month T-bill. Assume that the interest rate of the 6-month T-Bill is 2% per annum.
Use EXCEL to answer following questions:
1) Estimate the weekly expected returns, standard deviations of CBO and XIU,
respectively, and their correlation and covariance. Then convert them into those with
six-month (26 weeks) horizon.
2) Draw the opportunity set offered by these two securities.
3) What is the optimal portfolio of CBO and XIU? What are the expected return and
standard deviation of this portfolio?
4) Choose your degree of risk aversion with a range of the A value from 1 to 8.
5) Determine your optimal asset allocation among CBO, XIU, and T-Bill, in percentage, dollar amounts, and number of shares. What are the expected return and standard deviation of your complete portfolio?
Attach first and last pages of your spreadsheets to your assignment. However, you should answer the questions in a separate paper. Only one submission is needed for each group.
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