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H AAS S CHOOL OF B USINESS U NIVERSITY OF C ALIFORNIA AT BERKELEY UGBA 103 A VINASH V ERMA S OLUTION TO H OMEWORK 8 1. (a) Identify two publicly traded stocks, (b) download the daily data on historical price of the identified stocks from www.finance.yahoo.com , (c) make sure that the price histories are contemporaneous for the most recent 515 observations (for every trading day for which you have adjusted closing price 1 available for one stock, you should also have adjusted closing price available for the other stock), (d) compute daily return for the most recent 514 trading days, (e) compute annualized standard deviation of returns on each stock, (f) compute the correlation coefficient between the returns on the two stocks, (g) compute the risk-minimizing portfolio weight on the two stocks for a two-security portfolio, (h) work out the dollar amount that will be invested in each stock for a portfolio of $100 million, and (i) compute the standard deviation of the value of the portfolio one year from now. No single correct answer> Students get full credit so long as they: used adjusted closing price and not the closing price, computed returns correctly, computed the standard deviation correctly, annualized the standard deviation, computed the correlation correctly, used the formulas x 1 2 2 12 1 2 2 2 12 2 * = - + - σ and x x 2 1 1 * * = - correctly, computed SD(R p ) correctly by using the formula 2 1 12 2 1 2 2 2 2 2 1 2 1 2 2 ρ x x x x p + + = , and finally, computed SD(V(portfolio)) correctly as $100m*SD(R p ). 2. Ms. Adelgundes Krzyzanowska has $60 million invested as follows: $12 million in ABC Corporation, $42 million in XYZ Inc., and the remainder in the risk free asset. You are given that the standard deviation of annualized returns on ABC, XYZ, and Ms. Adelgundes Krzyzanowska’s portfolio as a whole, is 25%, 21%, and 18%, respectively. Solve for the correlation between returns on ABC and returns on XYZ. Denoting ABC as Security
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This note was uploaded on 04/30/2010 for the course L&S 101 taught by Professor Chow during the Spring '10 term at University of California, Berkeley.

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