Calculate the expected return of each of the following stocks. (Do not round int
ID: 2740874 • Letter: C
Question
Calculate the expected return of each of the following 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 of each of the following 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? (A negative answer should be indicated by a minus sign. 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? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)
You are given the following information:
Explanation / Answer
1. Expected return A = 0.110*1/3+0.107*1/3+0.081*1/3
= 0.09933 = 9.93%
Expected return B = 0.1146 = 11.46%
Standard Deviation
std dev A = Sqrt[(1/3)(0.0993 - 0.11)2 + (1/3)(0.0993 - 0.107)2 + (1/3)(0.0993 - 0.081)2] = 0.013
std dev B = Sqrt[(1/3)(0.1146+0.053)2+(1/3)(0.1146-0.156)2+(1/3)(0.1146-0.241)2] = 0.1235
Covariance:
covariance of A&B = (1/3)*(0.0993 - 0.11)((0.1146+0.053)+(1/3)(0.0993 - 0.107)(0.1146-0.156)+(1/3)(0.0993 - 0.081)(0.1146-0.241) = 0.00126
Correlation:
AB =AB/AB
=0.00126/0.013*0.1235 = 0.78
AB = Ss=1 Ps{[rAs – E(rA)][rBs – E(rB)]}
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