13_Estimating Correlation and Regression_sol

13_Estimating Correlation and Regression_sol - BM 410 HW...

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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 2005-2008, given the realized outcomes for Stock A and the Index fund above?
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C. 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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13_Estimating Correlation and Regression_sol - BM 410 HW...

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