Portfolio Rebalancing

You manage a portfolio of two stocks, FedEx Corp. (ticker: FDX) and McDonald’s Corp.

(ticker: MCD), that begins trading on 1/3/1995 with $20,000 invested. To exploit the bene ts

of diversi cation, the investment is split equally between both stocks, i.e. $10,000 are initially

allocated to each.

1

After setting up the portfolio, stock prices change and portfolio weights start

to deviate from the initial weights of 50% in each stock. Your task is to determine the trades

necessary for rebalancing the portfolio.

On Blackboard, you will nd a spreadsheet with daily prices for the two stocks from 1/3/1995

to 12/31/2014. The sheet also contains information on historical dividends and stock splits.

2

To

simplify the analysis, assume that the dividend dates in the spreadsheet are both the ex-dividend

date and the payment date.

3

The columns “Bid” and “Ask” are computed by adding and subtracting a percentage of the

daily closing price from that price itself { an input cell at the top of the spreadsheet controls

the magnitude of the bid-ask spread. By assuming a spread instead of relying on the actual bid

and ask prices that prevailed over the sample period, we will be able to investigate the e ect

of various hypothetical spreads on portfolio performance. For the baseline scenario, we will

assume a spread of 10 basis points (0.1%), which is realistic for a large company with a liquidly

traded stock.

A second source of transaction costs arises from brokerage fees. For retail investors, brokers

typically charge on a per-trade basis. A second input cell allows you to control the brokerage

fee. For the baseline scenario, we will assume a cost of $5 per trade.

In addition to the data table, I have set up three tables in the spreadsheet that contain the

portfolio positions before trading, the trades themselves, and portfolio positions after trading.

Your task is to work towards completing the missing columns of the “Trades” table.