Mean-variance based investing in DJIA stocks

In this chapter, you will explore portfolio optimization. For the upcoming exercises, you will focus on the Dow Jones Industrial Average (DJIA) stocks. Like the S&P 500 portfolio studied in Chapter 2, the Dow Jones Industrial Average portfolio is an important reference portfolio for the U.S. equity market. It is invested in 30 large publicly owned companies based in the United States.

You will be using the sample of monthly returns from January 1991 until December 2015. These return data are available in the workspace as the variable returns.

Assume you are an investor who likes high returns and dislikes risk. You are also constrained to be fully invested in the 30 DJIA stocks, and only positive weights are allowed. Which of the following statements is false:

Possible answers

You would rather invest all of your capital in Home Depot (ticker: HD) than in Caterpillar (ticker: CAT) because Home Depot has a higher average return and lower risk.

By combining investments, it may be possible to obtain a portfolio with lower variance than the variance of the Exxon Mobil Corporation’s stock (ticker: XOM).

An investor can create a portfolio of the thirty Dow Jones Industrial Average stocks that offers a higher average return than Apple (ticker: AAPL)

None of the above are true.

Exercise

Mean-variance based investing in DJIA stocks

Instructions

Possible answers