Problem Set 6
Ec 136, Fall 2009
This problem set is due Thursday November 12, in class. Sorry, no late prob
lem sets are accepted! All students must submit problem sets individually.
Please write your name, section time and GSI on the front page of your
solution.
1. Meanvariance analysis with two risky assets
The spreadsheet returns.xls contains annual return data for value and growth stocks. We
are going to use Excel to explore the e¢ cient frontier of value and growth stocks using
these data. Please turn in a printout of your two Excel graphs with your solution.
a) Download returns.xls, and clear the contents of columns D  Z (you will only need the
data contained in columns A, B and C). In columns D and E, compute the annual net
simple return of value and growth stocks in natural units (e.g., in D3, put =B3/100).
Also compute the average annual return, variance and standard deviation for both value
and growth, using the average and var functions in Excel (e.g., =var(D3:D84)). These
are our estimates of the expected return, variance and standard deviation.
1
b) Calculate the covariance of value stocks with growth stocks using the covar function.
If value had a high return in a year, what would you expect happened to growth? What
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 Fall '08
 SZEIDL
 Standard Deviation, Variance, 16%, 2%

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