Calculate the expected return for each of the stocks. (Do not round intermediate

Question

Calculate the expected return for each of the stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Calculate the standard deviation for each of the stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

What is the covariance between the returns of the two stocks? (Do not round intermediate calculations and round your answer to 6 decimal places, e.g., 32.161616.

What is the correlation between the returns of the two stocks? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)

Explanation / Answer

Expected Return

E(R) = w1R1 + w2Rq + ...+ wnRn

STOCK J

E(RJ) = 0.21 * .029 + 0.56 * .129 + .23 * .209 = - 0.00609 + 0.07224 + 0.04807= 0.11422 = 11.422 %

STOCK K

E(RK) = 0.21 * 0.025 + 0. 56 * .053 +0.23 * .083 = 0.00525 + 0.02968 + 0.01909 = 0.05402 = 5.402%

STANDARD DEVIATION

S(RJ) = [0.21 * (-0.029 -0.11422)2 + 0.56 * (0.129 -0.11422)2 + 0.23 * ( 0.209 - 0.11422 )2 ]1/2

= 0.0805977146077977 = 8.06%

S(RK) = [0.21 * (0.025 -0.05402)2 + 0.56 * (0.053 -0.05402)2 + 0.23 * (0 .083 - 0.05402 )2 ]1/2

0.0193080376009578 = 1.93%

Covariance between the returns of the two stocks

      2/3 × (0.10-0.0867) × (-0.02-0.12) + 1/3 × (0.06-0.0867) × (0.40-0.12)

COV (RA,RB) = 0.21 * (-0.029 -0.11422) * (0.025 -0.05402) + 0.56 * (0.129 -0.11422) * (0.053 -0.05402) + 0.23 * ( 0.209 - 0.11422 ) * (0 .083 - 0.05402 )

0.0014961156

Correlation between the return of two stocks = COV (RA,RB / S(RJ) * S(RK)

CORR(RA,RB) = 0.0014961156 / (0.0806 × 0.0193) =

= 0.961773486416642

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