The Table below shows the returns for three stocks, and portfolios of Pairs of Stocks Stock Returns Portfolio Returns North Air West Air 9% 21% 7% -2% -5% 30% 10.0% 10.0% 13.4% 13.4% Year 2010 2011 2012 2013 2014 2015 Average Return Volatility 21% 30% 7% -5% -2% 9% 10.0% 13.4% Tex Oil 1/2RN + 1/2Rw -2% 15.0% -5% 25.5% 9% 7.0% 21% -3.5% 30% -3.5% 19.5% 10.0% 12.1% 7% 1/2Rw+ 1/2RT 3.5% 8.0% 8.0% 9.5% 12.5% 18.5% 10.0% 5.1% a. From the three stocks in the above table, comment on the volatility and average return, and the pattern of the returns b. Which portfolio (combination of stocks), eliminated the highest risk? And what could be the plausible reason for that? c. Compute the covariance and correlation between pairs of stocks (North Air & West Air ; and West Air and Text oil)
The Table below shows the returns for three stocks, and portfolios of Pairs of Stocks Stock Returns Portfolio Returns North Air West Air 9% 21% 7% -2% -5% 30% 10.0% 10.0% 13.4% 13.4% Year 2010 2011 2012 2013 2014 2015 Average Return Volatility 21% 30% 7% -5% -2% 9% 10.0% 13.4% Tex Oil 1/2RN + 1/2Rw -2% 15.0% -5% 25.5% 9% 7.0% 21% -3.5% 30% -3.5% 19.5% 10.0% 12.1% 7% 1/2Rw+ 1/2RT 3.5% 8.0% 8.0% 9.5% 12.5% 18.5% 10.0% 5.1% a. From the three stocks in the above table, comment on the volatility and average return, and the pattern of the returns b. Which portfolio (combination of stocks), eliminated the highest risk? And what could be the plausible reason for that? c. Compute the covariance and correlation between pairs of stocks (North Air & West Air ; and West Air and Text oil)
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:The Table below shows the returns for three stocks, and portfolios of Pairs of Stocks
Stock Returns
Portfolio Returns
West Air
Year
2010
2011
2012
2013
2014
2015
Average Return
Volatility
North Air
21%
30%
7%
-5%
-2%
9%
10.0%
13.4%
Tex Oil 1/2RN + 1/2Rw
-2%
15.0%
-5%
25.5%
9%
7.0%
21%
30%
7%
9%
21%
7%
-2%
-5%
30%
10.0%
10.0%
13.4% 13.4%
-3.5%
-3.5%
19.5%
10.0%
12.1%
1/2RW + 1/2RT
3.5%
8.0%
8.0%
9.5%
12.5%
18.5%
10.0%
5.1%
a. From the three stocks in the above table, comment on the volatility and average return,
and the pattern of the returns
b. Which portfolio (combination of stocks), eliminated the highest risk? And what could be
the plausible reason for that?
c. Compute the covariance and correlation between pairs of stocks (North Air & West Air;
and West Air and Text oil)
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 4 steps with 5 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