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Unit II Supplemental Practice Problems

# Unit II Supplemental Practice Problems - Unit II...

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Unit II Supplemental Practice Problems 1. The following are the weekly prices of Coca-Cola stock over a five-week period Date Price July 10 42.65 July 17 43.90 July 24 44.52 July 31 43.85 August 7 43.76 a. Find the arithmetic mean return. b. Find the geometric mean return. c. Find the standard deviation of the return. d. Using the approximation we studied that applies when returns are normally distributed, find the estimated geometric mean return using the arithmetic mean and the standard deviation. How good is the approximation? e. Find the sequence of continuously compounded returns. f. Given your answer in d., show that their arithmetic average is the log of one plus the geometric mean return. 2. Find the expected return, standard deviation, covariance and correlation of the returns on two stocks, X and Y, given the following information. Market outcome Return on X Return on Y Probability Good year 0.12 0.09 0.30 Average year 0.05 0.02 0.30 Bad year -0.10 -0.05 0.40 3. Given the following information on three securities (J, K, and L), find the expected return and standard deviation of a portfolio consisting of 40% invested in J, 35% invested in K, and 25% invested in L. Stock Expected return Standard deviation J 0.12 0.28 K 0.22 0.65 L 0.09 0.15 Correlation between J and K: 0.44 Correlation between J and L: 0.70 Correlation between K and L: 0.52 4. Consider a portfolio with 50 stocks in which the average variance is 0.04 and the average covariance is 0.08.

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