You have decided to create your own index of higher-beta components of the Dow-Jones 30 Industrials. Using Yahoo ? s stock screener, you come up with the data below.

a. Compute the variance-covariance matrix of returns.

b. Assuming that the risk-free rate is 5.25% annually (= 5.25%/12 = 0.44% monthly), and that the expected high-beta index annual return is 12% (= 1% monthly), compute the Black-Litterman monthly expected returns for each stock.

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A B D F G H K M HIGH-BETA INDEX FROM DOW-JONES 30 COMPONENTS 1 American 3M American Hewlett Home Alcoa International Caterpillar DuPont Exxon Honeywell Intel McDonalds Merck Еxpress Company MMM Packard Depot IBM AA Group CAT DD хом HON INTC MCD MRK АХР HPQ HD AIG 3 Market cap SB) 85.66 39.11 1.37 77.91 180.72 55.7 49.08 519.89 126.75 78.37 47.55 146.78 172.03 62.88 106.93 4 Beta 1.07 1.06 1.17 1.98 1.06 1.13 1.6 1.2 1.3 1.9 1.81 1.37 1.16 6 Stock prices 7 2-Jul-02 56.69 24.41 29.46 61.98 20.21 35.54 32.85 13.22 29.07 28.77 17.76 67.04 22.57 38.95 1-Aug-02 3-Sep-02 58.56 22.64 30.12 60.89 19.73 34.46 31.88 12.54 31.00 26.78 15.78 71.94 21.67 39.67 49.78 17.41 26.05 30.46 16.83 36.16 53.08 30.84 28.69 10.96 24.61 19.37 13.14 55.65 16.11 57.47 21.41 53.95 57.91 56.28 42.01 51.06 52.06 49.80 10 1-Oct-02 19.91 35.32 41.28 40.53 60.70 18.84 35.27 30.27 14.84 27.23 18.37 75.34 16.52 37.66 38.65 39.35 64 2-Apr-07 1-May-07 1-Jun-07 82.31 87.96 86.79 60.52 69.75 72.32 48.81 79.04 42.07 45.63 44.62 21.39 22.18 23.74 101.81 48.28 65 84.82 72.34 78.25 52.32 83.17 106.60 50.55 77.97 83.20 66 61.03 70.03 50.84 83.88 105.25 50.78 67 2-Jul-07 90.21 43.08 84.51 69.04 52.62 91.94 48.54 39.39 60.98 24.55 114.81 52.09 49.02