CA0 Diversification with historical data

Six US stocks trade at fixed prices. Their end values are drawn from four historical months.

Objective

Choose a portfolio, with no short selling and cash enough for every buy. Assessed on final wealth.

What it shows

• Diversification: the same return for less risk.
• Correlation between stocks, drawn from real months.
• A choice made once, at quoted prices, with nobody on the other side.

Watch out for

• Putting all cash into the stock with the best recent month.
• Short selling is off, so a view against a stock cannot be expressed.
• Four possible months, and one of them is drawn.

Who takes part

• Investor — every student. Builds a portfolio from AXP, DD, DIS, DOW, UTX and GE.

Class size

Any size. Prices are quoted and fixed, so each student works alone; a class of twenty to forty makes a useful spread of portfolios to compare.