Consider a portfolio of two stocks (stock 1 and stock 2). The monthly returns of these two
Question:
Consider a portfolio of two stocks (stock 1 and stock 2). The monthly returns of these two stocks are presented in the accompanying Excel file.
This problem is created based on real stocks.
a. Find the expected monthly return of stock 1.
b. Find the variance of monthly returns of stock 1.
c. Find the expected monthly return of stock 2.
d. Find the variance of monthly returns of stock 2
e. Find the Covariance of monthly returns of stock 1 and stock 2.
f. Find the variance of sum of monthly returns of stock 1 and stock 2.
g. A new random variable is created by multiplying the monthly returns of stock 1 by 0.15. Find the variance of this new random variable.
h. Another new random variable is created by multiplying the monthly returns of stock 2 by 0.85. Find the variance of this new random variable.
i. Find variance of the sum of the new random variables created in the last two parts. (ONLY NEED TO ANSWER THIS ONE)
j. What percentage of investment should be made in stock 1 to minimize portfolio's risk with an expected return of at least 3%?
k. What percentage of investment should be made in stock 2 to minimize portfolio's risk with an expected return of at least 3%?
l. What is the minimum risk (standard deviation) of the portfolio with an expected return of at least 3%?
GE | IBM |
Stock1 | Stock2 |
-5.80 | 1.72 |
9.77 | 5.59 |
-4.76 | 2.23 |
13.64 | -2.19 |
4.51 | 4.74 |
2.70 | 2.54 |
5.35 | 6.06 |
Statistics for Business Decision Making and Analysis
ISBN: 978-0321890269
2nd edition
Authors: Robert Stine, Dean Foster