+1 862 207 3288 Diversification is an important part of a good investment strategy. The assignment is to analyze how
adding
real estate investments to a stock portfolio would affect the portfolio’s returns and risk. Your
submission
should be two pages:
1. The first page should be a printout of an Excel worksheet formatted as shown on the reverse side.
You should develop and populate an Excel spreadsheet which summarizes returns for stocks and
real estate and for a portfolio invested 80% in stocks and 20% in real estate.
For returns, we’ll use the returns on the following Vanguard index funds:
Stocks: Vanguard Total Stock Market Index Fund Admiral Shares
Real Estate: Vanguard REIT Index Fund Admiral Shares
If you go to Vanguard’s home page, choose the “Personal Investors” option, click on the
“Investment Products” link at the bottom and follow the “Stock funds” and “Sector & specialty
funds” links there will be lists of funds in which you’ll find the fund you’re looking for. (The REIT
Index fund is listed under “Sector & specialty funds.”) At the home page for each fund, go to the
“Prices and Performance” tab and then follow the “See cumulative, yearly and quarterly historical
returns” link. There you’ll find year-by-year returns from 2001 through 2014; be sure to use the
returns in the “Total Return” column.
After inputting returns for the Vanguard funds, create a column showing the returns on a portfolio
weighted 80% stocks and 20% REITs. Then use Excel functions to find the correlation between
the two funds and the average return and standard deviation for each of the funds and for the
portfolio. Add a row showing the Sharpe ratios for each of the funds and for the portfolio, using a
risk-free interest rate of 1.5% (the approximate average return on T-bills from 2001 to 2014).
2. On a second page, answer these questions:
a. What is a REIT? Why would investing in a mutual fund like the Vanguard REIT Index Fund
be a good way to invest in real estate?
b. Assume your initial portfolio is all stocks (100% in the Vanguard Total Stock Market Index
Fund). How does adding real estate (i.e., changing your portfolio mix to 80% Total Stock
Market, 20% REIT Index) change your (i) return, (ii) risk, (iii) Sharpe ratio?
c. Would adding the REIT index fund to your all-stock portfolio be a good idea? Briefly explain
why/why not. There may be considerations beyond the numbers you cite in part (b).
Your submission should be a maximum of two pages; the second page should be typed. It is to be turned
in at the beginning of class on November 30. (It should not be emailed unless you are absent from class
on
that day.)
