Stocks of TelcoLtd. andTisco Ltd. have the following historical returns :

(a) Calculate the average rate of return for each stock during the period 2000 to 2004. Assume that someone held a portfolio consisting of 50 percent of stock of Telco Ltd. and 50 percent of Stock of Tisco Ltd. What would have been the realized rate of return on the portfolio in each year from 2000 to 2004? What would have been the average return on the portfolio during this period?

(b) Now calculate the standard deviation of returns for each stock for the portfolio.

(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?

(d) If you added more stocks at random to the portfolio, which of the following is the most accurate statement of what would happen to ? _p ?

(i) ? _p would remain constant.

(ii) ? _p would decline to somewhere in the vicinity of 21 per cent.

(iii) ? _p would decline to zero if enough stocks were included.

Transcribed Image Text:

Year 2000 2001 2002 2003 2004 Telco Ltd's Return (10.00%) 18.50 38.67 14.33 33.00 Tisco Ltd's Return (3.00%) 21.29 44.25 3.67 28.30 Year 2000 2001 2002 2003 2004 Telco Ltd's Return (10.00%) 18.50 38.67 14.33 33.00 Tisco Ltd's Return (3.00%) 21.29 44.25 3.67 28.30

Answer rating: 100% (QA)

a The average rate of return for each stock is calculated simply by averaging the returns over the 5... View the full answer