FIN 132 - Efficient Frontier (Risk and Return) Professor A. Spieler The following table (Table 1) represents CLOSING prices for America Online (AOL), Anheuser Busch (BUD), Coca-Cola (KO), and Trans World Airlines (TWA). Assume the return on a Treasury Bill is 4% per year (.33% per month). Clearly indicate your answers by underlining or putting them in a box. The data in Tables 1 and 2 can be downloaded in spreadsheet form from the class Blackboard site. 1. (a) Calculate the MONTHLY returns for each asset (AOL, BUD, KO, TWA). (b) Calculate the variance and standard deviation of RETURNS for each asset (AOL, BUD, KO, TWA) over the 36-month period from 7/96-6/99. (c) Comment on the difference between expected return and realized return. (d) Find the total return over the 36-month period for each stock. Which stock had the highest and lowest returns? Was this expected? Are these results consistent with the general risk-return relationship? (e) Are these the actual closing prices or prices adjusted for changes in capitalization, i.e. stock splits, etc.? How do you know? 2. (a) Calculate the COVARIANCE and CORRELATION matrix for all pairs. Display your answers in a 4x4 table. (b) Verify that covariance between the asset and itself is equal to its variance (there may be some rounding error). (c) Verify that the correlation between all pairs of assets falls in the range [-1,1]. Verify that the correlation with an asset and itself is 1. (d) Do all assets move together? Interpret your results. 3. Graph the Capital Allocation Line for BUD and the risk-free asset. Extend the line past the 100% investment in BUD, i.e. short the risk-free asset. How do you interpret a weight in the risk-free