The Russell 2000 and S&p 100 by Writing Futures Contracts

Instructions for Homework #2

The spreadsheet on Blackboard provides monthly total returns data on five asset classes:

Russell 2000

S&P 100

Bond Market Index

Gold/Silver Index

Apple (Common stock)

For the work below, ONLY use data from 1988 to 2009.  Do NOT use data through 2013 (i.e. ignore 1/2010 through 12/2013)

1. You can short the Russell 2000 and S&P 100 by writing futures contracts.  You can also short Apple’s common stock.  You cannot short the Bond Market Index or the Gold Silver Index.  Using the template titled “MV”, perform a simple mean-variance optimization.  The template is self-explanatory and walks you through the basic steps.
2. The template titled “Sortino” takes you through a similar calculation for maximizing the Sortino ratio.  The Sortino ratios is very similar to a Sharpe ratio except that it uses a semi-standard deviation instead of a “regular” standard deviation.  To calculate the semi-standard deviation, compute the sum of squared deviations (just as you would a “regular” standard deviation) but only for observations that are below a target value of zero (min(0,return)).  That way, you are calculating a risk measure that is downside only.

Deliverables

1. Provide a hard copy (properly formatted) of the MV template so that I can see what you solutions look like.  I should be able to see the results of your calculations.  I do not need to see your formulas.  I do not need to see the original data.  This should be one page.
2. Provide a hard copy (properly formatted) of the Sortino template so that I can see what you solutions look like.  I should be able to see the results of your calculations.  I do not need to see your formulas.  I do not need to see the original data.  This should be one page.
3. In one paragraph (no more), explain why the portfolio allocations from the MV and Sortino templates are meaningfully different (or not, as the case may be).  
4. Staple all three of the above together in one document.  I should get three pages, stapled together.