Having selected two stocks, we will now draw the optimal capital allocation line with

two risky assets and one risk-free asset by determining the weight of each asset in the
portfolio, so that investment in that portfolio will bring the greatest expected rate of
return with a given level of risk aversion. To do this, we follow these steps:

The first step is to collect price data of MWG code and VRE code from 01/01/2021 to
30/11/2023. From this raw data, we would calculate daily rate of return per stock. This
then determines the expected rate of return as well as the standard deviation
corresponding to the two codes. Next, we estimate the expected rate of return on the risk
portfolio and the corresponding standard deviation by a corresponding change of a
percentage weight in the stock.

The second step is to determine the minimum-variance portfolio. By using the Solver
function in Excel, we obtained the risk portfolio with the smallest standard deviation
when the ratio of MWG and VRE was 50% and 50%, respectively. However, this is not
the optimum ratio needed to maximize sharp ratio. That is, the MWG and VRE structures
have made the portfolio with an expected rate of return of 0.0032%, not the maximum
expected yield. To find the optimal risky portfolio, we have used the Solver function, or
use the calculation formula as below:

W REE=¿ ¿

Mimimum-
variance
E(P) SD(P)
0.0032% 1.712%
As a final step, assuming the degree of risk aversion is 3 (A=3), we determine the
allocation of 10.88% of the capital to the risk portfolio and 89.12% to the risk-free asset.
The overall asset allocation of the complete portfolio is as follows:

Weight in risk-free asset

89.12%

Weight in MWG
10.88%

Weight in VRE 0.00%

Total
100%

Beta
MWG 1.179641
VRE 1.201086

Short-selling
A (Risk aversion) 3
W(MWG) 121%
W(VRE) -21%
Total 100%
E(P) 0.035%
rf 0.007%
Var(P) 0.00076745
SD(P) 0.027702886
y 12.40%
1-y 87.60%
Highest sharp ratio 0.010301521

Completed portfolio
W(MWG) 15.00%
W(VRE) -2.60%
W(T-bill) 87.60%
E(C) 0.01045%
SD(C) 0.00343384
 0.012%

0.010%

0.008%

0.006%

0.004%

0.002%

0.000%
0 0.0005 0.001 0.0015 0.002 0.0025 0.003 0.0035 0.004

NON-LEVERAGE PORTFOLIO SHORT-POSITION PORTFOLIO

MWG VRE
rf 0.007% 0.007%
1.20108
Beta 1.179640727 6
Risk premium 0.019% 0.019%
Cost of equity 0.0293% 0.0297%

To estimate the intrinsic value of 2 stock codes, use the FCFE method. However, there is
not enough data to determine the FCFE flow in future years and the terminal growth rate.
Therefore, it is impossible to determine whether the current stock value is high or low.
NON-LEVERAGING PORTFOLIO
Risk
Asset Beta Premium Weight E(r)
0.029
MWG 1.179640727 0.022% 10.88% %
0.030
VRE 1.201086235 0.023% 0.00% %
0.007
Risk free asset 0 0 89.12% %
0.009
Portfolio 0.128288346 100.00% %
0.002620
Portfolio Variance 0.00000687 Portfolio SD 9
Sharp ratio 0.007862592

SHORT-POSITION PORTFOLIO
Risk
Asset Beta Premium Weight E(r)
0.029
MWG 1.179640727 0.022% 15.00% %
0.030
VRE 1.201086235 0.023% -2.60% %
0.007
Risk free asset 0 0 87.60% %
0.010
Portfolio 0.145661114 0.0028% 100.00% %
0.003433
Portfolio Variance 0.00001179 Portfolio SD 8
Sharp ratio 0.010301521
 LEVERAGING PORTFOLIO
Asset Beta Risk Premium Weight E(r)
MWG 1.179640727 0.022% 72.4800% 0.029%
VRE 1.201086235 0.023% 48.3200% 0.057%
Risk free asset 0 0 -20.80% 0.007%
Portfolio 1.435368468 0.027% 100.0000% 0.034%
Portfolio Variance 0.000716791 Portfolio SD 0.0267729
Sharp ratio 0.010158745
There are 3 proposals for Portfolio: (1) Normal portfolio (2) Short-position portfolio and
(3) Leveraging portfolio.
A portfolio is considered the best when it has the highest sharp ratio
Therefore, proposal (2) Short-position portfolio is most appreciated