13_Estimating Correlation and Regression

13_Estimating Correlation and Regression - BM 410 HW #13 1....

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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. 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? C. Use your answers to (B ) to estimate the variance of the portfolio defined in (B). D. Now verify Stat rule #3. In particular, show that your answer for the estimated portfolio variance in #3 is equal to .6 2 Var(r A )+.4 2 Var(r I )+2*.6*.4*Cov(r A , r I ), where Var(r A ), Var(r I ), and Cov(r A , r I ) are pulled from your calculations for #1. 2.
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13_Estimating Correlation and Regression - BM 410 HW #13 1....

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