Week 4 Assignment

# Week 4 Assignment - Problem 7-4 Stock A has an expected...

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Problem 7-4 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 7-7 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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Week 4 Assignment - Problem 7-4 Stock A has an expected...

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