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Problem 74
Stock A has an expected return of 12% and a standard deviation of 40%. Stock B has an
expected return of 18% and a standard deviation of 60%. The correlation coefficient
between Stock A and B is 0.2. What are the expected returns and standard deviation of a
portfolio invested 30% in Stock A and 70% in Stock B?
Expected return is just the weighted average of the individual returns, so 12% * 0.3 +
18% * 0.7 = 16.2%.
(0.32)(0.42) + (0.72)(0.62) + 2(0.3)(0.7)(0.2)(0.4)(0.6)
= 0.0144 + 0.1764 + 0.02016 = 0.21096 = 0.459 = 45.9%
Problem 77
You are given the following set of data:
Historical rates of return
Year
NYSE
Stock X
1
(26.5%)
(14.0%)
2
37.2
23
3
23.8
17.5
4
(7.2)
2
5
6.6
8.1
6
20.5
19.4
7
30.6
18.2
a.
Use a spreadsheet (or a calculator with a linear regression function) to determine
Stock X’s beta coefficient.
Beta = 0.56; Intercept = 0.037; R2 = 0.96.
b.
Determine the arithmetic average rates of return for Stock X and the NYSE over
the period given. Calculate the standard deviations of returns for both Stock X and
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 Spring '09
 FI
 Finance

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