(1) You are advising a client about how to historically create the optimal portfolio and which asset classes to include. For example, do you include real estate? How? Do you include commodities? How? Which ones? (The easiest is to use REITs, and various exchange traded funds for as many asset classes as possible. You must find a stock fund, a bond fund, a real estate fund or a REIT, and something with other alternative asset investments. You will discuss the various asset classes you have considered for the optimal portfolio. There are various alternative asset ETFs and hedged ETFs to consider. Also examine international stocks and bonds, hedge funds, and private equity.
(2) You are also expected to give advice on how to construct a portfolio if the future is not quite like the past. How can you still earn reasonably high returns in an environment of diminished earnings expectations for stocks and bonds (a feeling that we may be in a period low returns for stocks and bonds, a future where we likely have rising interest rates, and where people are still likely risk-averse, but want more than the extremely low return on T-bills or money market funds (for example how do you get more than 0.1% to 0.7%? without taking on excessive risk?)
You are going to go to Yahoo-Finance to get returns. You can do these monthly. Ideally you will find at least 10 years of returns. So you need to collect data for at least 121 months
Some examples of funds on Yahoo include: AGG, SPY, GLD, SLV, CORN, FXI, EWU, DBC, but also find some Canadian funds.
Use your return series and obtain historical values for returns, standard deviations, and correlations for lots of asset classes.
Then plug various combinations of these numbers into the Efficient Frontier optimizer program.
Go to this site to calculate efficient frontiers:
https://finance.wharton.upenn.edu/~stambaug/portopt.html
Pick a degree of risk aversion for yourself (you decide if you or your hypothetical client id a conservative, average, or aggressive investor). Then let’s construct an optimal portfolio using many asset classes. Initially, do not allow short sales.
(1)If you are doing an in-class presentation, do a simple 3 asset portfolio. (A) List your selected risk aversion coefficient. Also, list the name of your three funds, the time period of data, the average return for each, standard deviations for each asset class, and the correlations for your 3X3 matrix of correlations. (B) Indicate whether a stock index, a bond index and a real estate index all belong in the optimal portfolio. You can use either US or Canadian data. (C) Show the weights for each asset class in the optimal portfolio and show your expected monthly return and standard deviation (if the future is like the past). Indicate whether real estate improves the portfolio in terms of either lower risk or higher returns. If you are doing an in-class presentation, you are done with this assignment after looking at 3 asset classes

(2)If you are not doing an in-class presentation, the optimal portfolio becomes your project for the semester. You will write up (type up a report). No short sales to start.
(A)First, do the same assignment that everyone else is doing. Start with two assets: stocks and bonds. Then determine whether adding real estate improves the portfolio’s risk reward characteristics.
(B)Now move to a more diversified portfolio with six to eight asset classes. Try to avoid individual stocks and use broader asset classes, such as ETFs. Find the optimal weights for each asset class. Show the benefits of moving up to 6 to 8 asset classes. You may need to collect data for more than 8 assets because some may drop out of your portfolio for various reasons—such as unrepresentative performance in recent years, or because they are dominated by other asset classes. in addition to the asset classes selected for your final portfolio, indicate which types of assets you tried and eliminated

(C) Discuss possible problems with choices of asset classes. You may have to delete some and add others even if it means getting lower returns. This is due to problems encountered in many optimizer situations. Present your final portfolio and your general recommendations for inclusion of asset classes.
(D)Finally, discuss alternatives in the possible difficult future situation where the past may not be repeating itself for several years. Indicate what you recommend. Tell and sell your story. This may involve several pages of writing and you can quote other people here. List references for this part.
Overall, this can be a group project and may end up being 8-12 pages including computer output.

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