ActSc 372 Winter 2010
Assignment 2
Due Date: Friday, February 5, 2010 (Beginning of Class)
1. The returns on smallcapitalization stocks and on the S&P/TSX 300 Index of common
stocks from 2001 through 2005 are tabulated as follows:
SmallCapitalization
Market Index of
Year
Stocks
Common Stocks
1991
18.51%
12.02%
1992
13.01%
1.43%
1993
52.06%
32.56%
1994
9.21%
0.18%
1995
12.55%
14.53%
(a) Calculate the average return for the smallcapitalization stocks and the market
index of common stocks
(b) Calculate the variance and standard deviation of returns for the smallcapitalization
stocks and the market index of common stocks
(c) Calculate the correlation between the returns for the smallcapitalization stocks
and the market index of common stocks.
2. Suppose you have invested only in two stocks, A and B. You expect that returns on
the stocks depend on the following three states of economy:
State of Economy
Probability
Return on Stock A (%)
Return on Stock B (%)
Bear
0.2
12.3
3.7
Normal
0.5
6.5
3
Bull
0.3
3
5
(a) Calculate the expected return of each stock.
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 Spring '10
 Tan,KenS
 10%, 18%, 0.18%, 1.43%, 9.21%

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