Finance Problem

Case Analysis Of Gonzales V. Raich
March 14, 2019

Finance Problem



Note: As discussed in class, this assignment is optional. See the LEARN posting for Mach 4 for details.)

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 70% in stocks and 30% in real estate.

For returns, we’ll use the returns on the following Vanguard index funds:

Stocks: Vanguard Total Stock Market Index Admiral Shares fund Real Estate: Vanguard Real Estate Index Admiral Shares fund

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 Total Stock Market fund is listed under stock funds and the Real Estate 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 “Cumulative, yearly and quarterly historical returns” link. There you’ll find year- by-year returns from 2004 through 2018; 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 70% stocks and 30% real estate. 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. (For standard deviation, note that these 15 years are a sample of returns for these funds.) Add a row showing the Sharpe ratios for each of the funds and for the portfolio, using a risk-free interest rate of 1.2% (the average return on T-bills from 2004 to 2018).

2. On a second page, answer these questions:

a. The Real Estate Index fund invests in REITs. What is a REIT? Why would investing in a mutual fund like the Vanguard Real Estate 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 70% Total Stock Market, 30% Real Estate 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).

If you choose to do this assignment, 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 March 11. (It should not be emailed unless you are absent from class on that day.)

Total Real Portfolio Stock Estate (70% stock,

Market Index 30% Real) Fund Fund Estate )

Weights 0.7 0.3

2018 -5.17% -5.95% ? 2017 ? ? ? 2016 ? ? ? 2015 ? ? ? 2014 ? ? ? 2013 ? ? ? 2012 ? ? ? 2011 ? ? ? 2010 ? ? ? 2009 ? ? ? 2008 ? ? ? 2007 ? ? ? 2006 ? ? ? 2005 ? ? ? 2004 ? ? ?


STD DEV ? ? ?



Assume an average risk-free rate (2014 – 2018) of 1.2%



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