Stock A and Stock B have the following historical returns: Year.............. Stock A's Returns, Ra............... Stock B's
Question:
Stock A and Stock B have the following historical returns:
Year.............. Stock A's Returns, ¨Ra............... Stock B's Returns, ¨rB
2008.....................10.00%....................................3.00%0000
2009.....................18.50......................................21.290000%
2010.....................38.67......................................44.250000%
2011.....................14.33.......................................3.670000%
2012.....................33.00......................................28.300000%
a. Calculate the average rate of return for each stock during the period 2008- 2012. Assume that someone held a portfolio consisting of 50 percent Stock A and 50 percent Stock B. What would have been the realized rate of return on the portfolio in each year from 2008 through 2012? What would have been the average return on the portfolio during this period?
b. Calculate the standard deviation of returns for each stock and for the portfolio. Use Equation 11-4.
c. Looking at the annual returns data on the two stocks, would you guess that the correlation coefficient between returns on the two stocks is closer to 0.9 or to - 0.9? Explain your answer.
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