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 round your answers to 2 decimal places. (e.g., 32.16))

Calculate the standard deviation for each of the stocks. (Do not round intermediate calculations and round your answers 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 4decimal places. (e.g., 32.1616))

Explanation / Answer

Expected Return:

Stock J = (0.23 x -0.013) + (0.58 x 0.145) + (0.19 x 0.225) = 0.08211 or 8.211%
Stock K = (0.23 x -0.041) + (0.58 x 0.069) + (0.19 x 0.099) = 0.02921 or 2.921%

Standard Deviation (s): Standard deviation is square root of Variance.

Variance of Stock J (sJ) :
[(-0.013 – 0.08211)2 x 0.23] + [(0.145 – 0.08211)2 x 0.58] + [(0.225 – 0.08211)2 x 0.19] = 0.008253883

Standard Deviation of Stock J = (0.008253883)1/2 = 0.090850883 or 9.09%

Variance of Stock K (sK):
[(-0.041 – 0.02921)2 x 0.23] + [(0.069 – 0.02911)2 x 0.58] + [(0.099 – 0.08211)2 x 0.19] = 0.002977476

Standard Deviation of Stock J = (0.002977476)1/2 = 0.054566254 or 5.46%

Covariance between Stocks:

where

Covariance = [(-0.013 – 0.08211) x (-0.041 – 0.02921) x 0.23] + [(0.145 – 0.08211) x (0.069 – 0.02911) x 0.58] + [(0.225 – 0.08211) x (0.099 – 0.08211) x 0.19] = 0.004881989

Correlation between the stocks:

COR1,2 = Cov(R1,R2) / (s1*s2)

CORJ,K = 0.004881989 / (0.090850883 * 0.054566254) = 0.984789611

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