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Case Analysis - Portfolio Diversification Enigma

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Using the past 10 years of annual return data (provided in Exhibit 1) for the S&P CNX Nifty Index and the CNX Bank Index, calculate the mean standard deviation and covariance/correlations for each asset class. With the help of these numbers, estimate the portfolio risk and return for Kaushesh's existing portfolio. After adding a new asset class (gold), what is your assessment of portfolio risk and return? Estimate the resulting portfolio position in terms of risk and return using the data in Exhibits 1 and 2. How does a diversified portfolio position compare with that in Question 1? Estimate the Sharpe Ratio for the diversified portfolio (gold and equity) versus an all-equity portfolio using the results from Questions 1 and 2. Comment on the results obtained and the implications they carry with regard to the significance of diversification. Based on your data analysis, should Kaushesh diversify his portfolio or continue to remain invested in equity only? MS Excel and MS Word documents required.
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