A. Calculate the covariance for the returns of stock 1 and stock 2 given the six years of historical returns presented below: 

Year	NSC Return (1)	JSE Return (2)
2016	+0.10	+0.20
2017	-0.15	-0.20
2018	+0.20	-0.10
2019	+0.25	+0.30
2020	-0.30	-0.20
2021	+0.20	+0.60

B. Given that the standard deviation of stock 1 and stock 2 in the table above is 0.2236 and 0.3225, respectively, use your answer in (A) to calculate and interpret the correlation between the 2 assets. 

Based on the characteristics of NSC and JSE above you are considering forming a portfolio comprising the two stocks such that you invest the following amounts:

i. $40000 and $60000 in company NSC and JSE respectively in the first instance, and alternatively

ii. $70000 and $30000 in company NSC and JSE respectively.

C. What is the expected return and standard deviation of the portfolio in the two instances above? 

Answer rating: 100% (QA)

To calculate the covariance between the returns of stock 1 NSC and stock 2 JSE we can use the following formula Covariance Return of stock 1 Mean retu... View the full answer