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Following are several months rate of return for Market Index, Stock A, and Stock B. The
variance and covariance matrix is constructued from the returns data.
Returns Data
Returns on
Returns on Stock Returns on Stock
Market
A
B
10%
15%
5%
7%
12%
8%
9%
13%
2%
11%
14%
5%
-2%
5%
10%
Variance of market returns is 22.0, variance of stock A is 12.6 and variance of stock B is
7.4. Covariance between market return and stock A returns is 16.4 and between market
returns and Stock B returns is -9.6. The correlation coefficient between returns of Stock A
and Stock B is -7.
Compute:
a. Average returns for the Market Index, Stock A, and Stock B.
b. If you have created a portfolio with 60% on Stock A and 40% on Stock B. what is the
c. What is the portfolio standard deviaiton for your portfolio in part b.
d. Compute the beta of each stock and identify each stock as Aggressive or Neutral or
Defensive stock.
e. What is your portfolio beta in part b.

#a Average Return Market Index = 1/5 x (10% + 7% + 9% + 11% - 2%) = 7% Average Return Stock A = 1/5 x (15% + 12% + 13% + 14%... View the full answer

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