Complete the following table by computing correlation coefficients between stocks A and B and between stocks A and C, and calculate average returns and standard deviation for the two potential portfolios, AB and AC:
Complete the following table by computing correlation coefficients between stocks A and B and between stocks A and C, and calculate average returns and standard deviation for the two potential portfolios, AB and AC:
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Julian is an investor who believes that past variability of stocks is a reasonably good estimate of future risk associated with the stocks. Julian works on creating a new portfolio and has already purchased stock A. Now he considers two other stocks, B and C. Julian collected data on the historic rates of return for all three stocks, which are presented in the following table.
|
Year
|
Stock A
|
Stock B
|
Stock C
|
|---|---|---|---|
| 2014 | 20% | -5% | 5% |
| 2015 | -5% | 5% | -5% |
| 2016 | 5% | -10% | 20% |
| 2017 | -10% | 20% | -10% |
| Average return | 2.5 | 2.5 | 2.5 |
| Estimated standard deviation | 13.23 | 13.23 | 13.23 |
Suppose Julian can only afford to complement stock A by adding just one of the two other stocks, either stock B or stock C. Complete the following table by computing correlation coefficients between stocks A and B and between stocks A and C, and calculate average returns and standard deviation for the two potential portfolios, AB and AC:
|
|
Stocks A and B
|
Stocks A and C
|
|---|---|---|
| Correlation coefficient | ||
| Average return | ||
| Standard deviation |
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