Suppose that you are given the following information about a stock and a market index: Stock Returns:

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Question:

Suppose that you are given the following information about a stock and a market index:

Stock Returns: 10%, 4%, -6%, 12%, 8%
Market Index Returns: 8%, 6%, -4%, 10%, 7%

a) Calculate the average return and standard deviation for both the stock and the market index.
b) Calculate the covariance and correlation between the stock and the market index.
c) If the risk-free rate is 3%, calculate the expected excess return and the expected Sharpe ratio for the stock.
d) Suppose that you want to construct a portfolio that invests 60% in the stock and 40% in the market index. Calculate the expected return and standard deviation of this portfolio.
e) Based on your answers in parts (a) to (d), would you recommend investing in the stock, the market index, or the portfolio of the two? Explain your reasoning.