Need help with the following problems:Each problem should be presented on a separate, named tab within the submitted Excel file

Chapter 6 Problems:

1. Compute the abnormal rates of return for the following stocks during period t (ignore differential

systematic risk):

StockRi tRmt

B11.5%4.0%

F10.08.5

T14.09.6

C12.015.3

E15.9 12.4

Rit = return for stock i during period t

Rmt = return for the aggregate market during period t

2. Compute the abnormal rates of return for the five stocks in Problem 1 assuming the following

systematic risk measures (betas):

Stocki

B0.95

F1.25

T1.45

C0.70

E0.30

3. Compare the abnormal returns in Problems 1 and 2 and discuss the reason for the difference

in each case.

Chapter 7 problems:

3. The following are the monthly rates of return for Madison Cookies and for Sophie Electric

during a six-month period.

Month Madison CookiesSophie Electric

1 0.040.07

20.06 0.02

3 0.07 0.10

40.12 0.15

50.020.06

60.05 0.02

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 why not?

7. The following are monthly percentage price changes for four market indexes.

MonthDJIAS&P 500 Russell 2000 Nikkei

10.03 0.02 0.04 0.04

2 0.07 0.06 0.10 0.02

3 0.02 0.01 0.04 0.07

4 0.01 0.030.030.02

5 0.050.040.110.02

6 0.06 0.04 0.08 0.06

Compute the following.

a. Average monthly rate of return for each index

b. Standard deviation for each index

c. Covariance between the rates of return for the following indexes:

DJIAS&P 500

S&P 500Russell 2000

S&P 500Nikkei

Russell 2000Nikkei

d. The correlation coefficients for the same four combinations

e. Using the answers from parts (a), (b), and (d), calculate the expected return and standard

deviation of a portfolio consisting of equal parts of (1) the S&P and the Russell

2000 and (2) the S&P and the Nikkei. Discuss the two portfolios.