The following are the monthly rates of return for Madison Cookies and for Sophie Electric during a six-month period. Month 1 2 3 4 5 6 Madison Cookies -0.04 0.06 -0.07 0.12 -0.02 0.05 Sophie Electric 0.07 -0.02 -0.10 0.15 -0.06 0.02 Compute the following. a. Average monthly rate of return R, for each stock b. Standard deviation of returns for each stock c. Covariance between the rates of return d. The correlation coefficient between the rates of return What level of correlation did you expect? How did your expectations compare with the computed correlation? Would these two stocks be good choices for diversification? Why or why not?
The following are the monthly rates of return for Madison Cookies and for Sophie Electric during a six-month period. Month 1 2 3 4 5 6 Madison Cookies -0.04 0.06 -0.07 0.12 -0.02 0.05 Sophie Electric 0.07 -0.02 -0.10 0.15 -0.06 0.02 Compute the following. a. Average monthly rate of return R, for each stock b. Standard deviation of returns for each stock c. Covariance between the rates of return d. The correlation coefficient between the rates of return What level of correlation did you expect? How did your expectations compare with the computed correlation? Would these two stocks be good choices for diversification? Why or why not?
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
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Transcribed Image Text:3. The following are the monthly rates of return for Madison Cookies and for Sophie Electric
during a six-month period.
Month
1
2
345WN
6
Madison Cookies
-0.04
0.06
-0.07
0.12
-0.02
0.05
Sophie Electric
0.07
-0.02
-0.10
0.15
-0.06
0.02
Compute the following.
a. Average monthly rate of return R; for each stock
b. Standard deviation of returns for each stock
c. Covariance between the rates of return
d. The correlation coefficient between the rates of return
What level of correlation did you expect? How did your expectations compare with the
computed correlation? Would these two stocks be good choices for diversification? Why
or why not?
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Step 1: a. Calculation of Average Monthly Rate of Return for each stock is as follows:
VIEWStep 2: b. Calculation of Standard Deviation of Return for each stock is as follows:
VIEWStep 3: c. Calculation of Covariance between two returns is as follows:
VIEWStep 4: d. Calculation of Correlation coefficient between two returns:
VIEWStep 5: Here are the stocks that offer a wide range of options for diversification:
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