# Question: The following are the monthly rates of return for Madison

The following are the monthly rates of return for Madison Cookies and for Sophie Electric during a six-month period.

Compute the following.

a. Average monthly rate of return Ri 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 whynot?

Compute the following.

a. Average monthly rate of return Ri 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 whynot?

**View Solution:**## Answer to relevant Questions

You are considering two assets with the following characteristics.E(R1) = 0:15 E(σ1) = 0:10 w1 = 0:5E(R2) = 0:20 E(σ2) = 0:20 w2 = 0:5Compute the mean and standard deviation of two portfolios if r1,2 = 0.40 and −0.60, ...The following information applies to Questions 1a and 1b. The general equation for the weight of the first security to achieve minimum variance (in a two-stock portfolio) is given bya. Show that w1 = 0.5 when σ1 = σ2.b. ...You have been offered an opportunity to invest in one of the two fully diversified portfolios, Portfolio H and Portfolio L. While you know that the betas of these portfolios are identical, you only know that, on average, the ...You are an analyst for a large public pension fund and you have been assigned the task of evaluating two different external portfolio managers (Y and Z). You consider the following historical average return, standard ...The small-firm effect refers to the observed tendency for stock prices to behave in a manner that is contrary to normal expectations. Describe this effect and discuss whether it represents sufficient information to conclude ...Post your question