Problem 2. For the following set of questions you will need to use the returns data contained in the Excel spreadsheet ps3 prob2 data.xls. In this file, the first column contains the date. Subsequent columns contain the returns to thea)Value Weighted (VW) index of exchange listed stocks, b) IBM, c) USX, and d) GM common stocks. Column 6 contains the return on the one month T-Bill. In all cases, the return is the simple return (one month) over the period from the previous date up to the date in column 1. (Note: the return for the first row (date 30JAN1926) is from 12/31/25 to 1/30/26.) In all cases, the returns properly account for dividends, splits and stock dividends.

1. Find the average returns on the VW Index, the T-Bill and each of the three stocks over the entire period from the beginning of 1926 through the end of 1999.

1. Find the variance of each of these returns over the entire period.

1. Calculate the covariance between the return on IBM and the return on USX. Calcu- late the covariance between the return on USX and the return on GM. Calculate the covariance between the return on IBM and the return on GM.

1. Consider the following two portfolios:

• Portfolio A had 60% invested in IBM, 20% in USX and 20% in GM at the beginning of each month
• Portfolio B had 60% invested in USX, 20% in GM and 20% in IBM at the beginning of each month.

1. Using just the average returns and variances of the three stocks, plus the covari- ances between the stocks (calculated in parts a, b and c), calculate the average returns and variances of these two portfolios, and the covariance between the two portfolios.

1. Now on a spreadsheet calculate the realized returns of each the portfolios for each month. Using these realized returns calculate the portfolio average returns, vari- ances and the covariance directly, confirming your answers from above.

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To accomplish this task in STATA youll follow these general steps 1 Import the Excel spreadsheet con... View the full answer