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BM 410 HW #13
1.
Suppose you observe the annual realized historical returns over the last four years for
some stock A and an index fund as given below.
A.
Estimate the covariance and the correlation between stock A and the index fund
without using excel functions.
You may choose to use Excel to do the arithmetic, but
you should be able to do such problems using a calculator only.
Year
Stock A
Index Fund
Dev_A
Dev_I
Dev_A*Dev_I Dev_A^2
Dev_I^2
2005
17
8
16
5
80
256
25
2006
15
3
16
0
0
256
0
2007
5
5
4
2
8
16
4
2008
3
4
4
7
28
16
49
Covariance
Var(A)
Var(I)
E[r]
1
3
29
136
19.5
Correlation
Stdev(A)
Stdev(I)
0.563133337
11.6619
4.41588
B.
Now suppose you have a portfolio with 60% in A and 40% in the index fund.
What
would have been your portfolio return each year from 20052008, given the realized
outcomes for Stock A and the Index fund above?
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View Full DocumentC. Use your answers to (B ) to estimate the variance of the portfolio defined in (B).
D. Now verify Stat rule #3.
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 Fall '10
 BrianBoyer

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