a) Calculate the average rate of return for each stock during the period 2004 through 2008. Assume that someone held a portfolio consisting of 50% of Stock A and 50% of Stock What would the realized rate of return on the portfolio have been in each year from 2004 through 2008? What would the average return on the portfolio have been during that period? b) Calculate the standard deviation of returns for each stock and for the portfolio. c) Looking at the annual returns on the two stocks, would you guess that the correlation

icon
Related questions
Question
100%
Stocks A and B have the following historical returns:
Year Stock A return
Stock B return
2004
(24.25%)
5.5%
2005
18.5%
26.73%
2006
38.67%
48.25%
2007
14.33%
(4.5%)
2008
39.13%
43.86%
a) Calculate the average rate
return for each stock during the period 2004 through 2008.
Assume that someone held a portfolio consisting of 50% of Stock A and 50% of Stock
What would the realized rate of return on the portfolio have been in each year from 2004
through 2008? What would the average return on the portfolio have been during that
period?
b) Calculate the standard deviation of returns for each stock and for the portfolio.
c) Looking at the annual returns on the two stocks, would you guess that the correlation
coefficient between the two stocks is closer to +0.8 or to -0.8?
d) If more randomly selected stocks had been included in the portfolio, which of the
following is the most accurate statement of what would have happened to p?
I.
p would have remained constant.
II.
p would have been in the vicinity of 20%.
III.
p would have declined to zero if enough stocks had been included.
Transcribed Image Text:Stocks A and B have the following historical returns: Year Stock A return Stock B return 2004 (24.25%) 5.5% 2005 18.5% 26.73% 2006 38.67% 48.25% 2007 14.33% (4.5%) 2008 39.13% 43.86% a) Calculate the average rate return for each stock during the period 2004 through 2008. Assume that someone held a portfolio consisting of 50% of Stock A and 50% of Stock What would the realized rate of return on the portfolio have been in each year from 2004 through 2008? What would the average return on the portfolio have been during that period? b) Calculate the standard deviation of returns for each stock and for the portfolio. c) Looking at the annual returns on the two stocks, would you guess that the correlation coefficient between the two stocks is closer to +0.8 or to -0.8? d) If more randomly selected stocks had been included in the portfolio, which of the following is the most accurate statement of what would have happened to p? I. p would have remained constant. II. p would have been in the vicinity of 20%. III. p would have declined to zero if enough stocks had been included.
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 5 steps with 3 images

Blurred answer
Knowledge Booster
Investment in Stocks
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.