Stocks A and B have the following historical returns: Year rA rB 2015 -18% 56% 2016 44% 8% 2017 -22% -4% 2018 22% 24% 2019 34% -24% A. Calculate the average rate of return for each stock during the 5-year perioc that someone held a portfolio consisting of 50% of Stock A and 50% of Sto What would have been the realized rate of return on the portfolio in each y would have been the average return on the portfolio for the 5-year period? B. Now calculate the standard deviation of returns for each stock and for the C. Looking at the annual returns data on the two stocks, would you guess tha correlation coefficient between returns on the two stocks is closer to 0.8 c D. If you added more stocks at random to the portfolio, which of the following most accurate statement of what would happen to o,? I. O, would remain constant. II. O, would decline to somewhere in the vicinity of 20%. II. O, would decline to zero if enough stocks were included.
Stocks A and B have the following historical returns: Year rA rB 2015 -18% 56% 2016 44% 8% 2017 -22% -4% 2018 22% 24% 2019 34% -24% A. Calculate the average rate of return for each stock during the 5-year perioc that someone held a portfolio consisting of 50% of Stock A and 50% of Sto What would have been the realized rate of return on the portfolio in each y would have been the average return on the portfolio for the 5-year period? B. Now calculate the standard deviation of returns for each stock and for the C. Looking at the annual returns data on the two stocks, would you guess tha correlation coefficient between returns on the two stocks is closer to 0.8 c D. If you added more stocks at random to the portfolio, which of the following most accurate statement of what would happen to o,? I. O, would remain constant. II. O, would decline to somewhere in the vicinity of 20%. II. O, would decline to zero if enough stocks were included.
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
Related questions
Concept explainers
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:DO NOT ANSWER IN EXCEL
Stocks A and B have the following historical returns:
Year
rA
rB
2015
-18%
56%
2016
44%
8%
2017
-22%
-4%
2018
22%
24%
2019
34%
-24%
A. Calculate the average rate of return for each stock during the 5-year period. Assume
that someone held a portfolio consisting of 50% of Stock A and 50% of Stock B.
What would have been the realized rate of return on the portfolio in each year? What
would have been the average return on the portfolio for the 5-year period?
B. Now calculate the standard deviation of returns for each stock and for the portfolio.
C. Looking at the annual returns data on the two stocks, would you guess that the
correlation coefficient between returns on the two stocks is closer to 0.8 or to 20.8?
D. If you added more stocks at random to the portfolio, which of the following is the
most accurate statement of what would happen to o,?
I.
O, would remain constant.
II.
O, would decline to somewhere in the vicinity of 20%.
II.
O, would decline to zero if enough stocks were included.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 3 images
Knowledge Booster
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.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education