HW6-SSII-excel

HW6-SSII-excel - ECN 134, SSII09 Problem Set 6 3-You have...

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ECN 134, SSII09 Problem Set 6 3-You have \$500 to invest. You decide to split it into two parts. The return on each \$250 will be determined by a coin flip. If the coin comes up heads the investment will return 10%, and if it comes up tails the investment returns -10%. What is the average return, the return variance, and the return standard deviation of this investment, if you flip the coin one time? 4- In the previous exercise it was assumed that the correlation between the coin flips is 0. Repeat the exercise with the following correlations: (a) If the first coin flip is heads, then the second coin flip will be heads as well, and vice versa (correlations of +1). (b) If the first coin flip is heads, then the second coin flip will be tails as well, and vice versa (correlations of -1). (c) If the first coin flip is heads, then the second coin flip will be heads with the probability of 0.8. If the first coin flip is heads, then the second coin flip will be tails with the probability of 0.6. (d) What can you conclude about the connection between the variance of the return of the coin flips and the correlation between the flips? 5- Calculate the average return and the variance of the portfolio composed of 30% GM and 70% MSFT stocks, using the following data. A PORTFOLIO OF GM AND MSFT STOCK Date Stock returns Portfolio returns GM MSFT Dec-90 -11.54% 72.99% 30.73%<-- =\$B\$11*B16+\$B\$12*C16 Dec-91 -11.35% 121.76% 55.21% Dec-92 16.54% 15.11% 15.82% Dec-93 72.64% -5.56% 33.54% Dec-94 -21.78% 51.63% 14.93% Dec-95 28.13% 43.56% 35.84% Dec-96 8.46% 88.32% 48.39% Dec-97 19.00% 56.43% 37.71% Dec-98 21.09% 114.60% 67.85% Dec-99 21.34% 68.36% 44.85% Average, E(r GM ) and E(r MSFT ) 14.25% 62.72% 38.49%<-- =AVERAGE(E16:E25) Variance, Var(r GM ) and Var(r MSFT ) 6.38% 14.43% 2.44%<-- =VARP(E16:E25) Standard deviation, s GM and s MSFT 25.25% 37.99% 15.62%<-- =STDEVP(E16:E25) Covariance of returns, Cov(r GM ,r MSFT ) -5.52%<-- =COVAR(B16:B25,C16:C25)

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6- Consider the following statistics for portfolio composed of shares of Companies A and B: Company A stock Company B stock Average return 25% 48% Variance 0.0800 0.1600 Sigma 28.28% 40.00% Covariance of returns 0.00350 Correlation of returns 0.03094<-- =B10/(B8*C8) Portfolio Proportion of A 0.9 Proportion of B 0.1 Portfolio average return 27.30%<-- =B14*B6+C6*B15 Portfolio standard deviation 25.89%<-- =SQRT(B14^2*B7+B15^2*C7+2*B14*B15*B10) (a) Suggest a portfolio combination that improves return while maintaining the same level of risk. (b) Calculate the minimum variance portfolio for the portfolio composed of the two assets described above. 7- ABC and XYZ are two stocks with the following return statistics: Expected return Standard deviation of return ABC 15% 33% XYZ 25% 46% Covariance(ABC,XYZ) 0.0865 Correlation(ABC,XYZ) 0.5698 Portfolio Percentage ABC 25.00% Percentage XYZ 75.00% Expected return 22.50%<-- =B18*B11+B19*B12 Standard deviation 39.78%<-- =SQRT(B18^2*C11^2+B19^2*C12^2+2*B18*B19*B13) (a) Compute the expected return and std deviation of a portfolio of 25% ABC and 75% XYZ
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This note was uploaded on 11/02/2009 for the course ECON 134 taught by Professor Mojaver during the Summer '08 term at UC Davis.

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HW6-SSII-excel - ECN 134, SSII09 Problem Set 6 3-You have...

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