Suppose you are currently investing in HSBC. Your broker tells you not to put all your...

 

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Suppose you are currently investing in HSBC. Your broker tells you not to put all your eggs in one basket and suggests you to diversify your investment risk by putting half your investment in the China Light and Power Company (CLP). The following table shows a sample of the annual returns to HSBC (X) and CLP (Y) for the last seven months. Year (2016) Monthly returns of HSBC, x, (in %) 6.2735 6.6706 -9.4632 3.0562 -2.7877 -5.9793 -0.6489 Table 3 Monthly returns of China Light and Power (CLP), y; (in %) Jan Feb Mar Apr May Jun Jul (a) Calculate the sample variance of X and Y. (3 points) -1.0955 -0.6260 -0.7076 1.1867 3.6863 3.6814 5.5678 (b) Calculate the sample covariance and the sample correlation of X and Y. (4 points) (c) Do you think buying HSBC and CLP simultaneously can effectively diversify the risk? Explain your answer. (3 points) Suppose you are currently investing in HSBC. Your broker tells you not to put all your eggs in one basket and suggests you to diversify your investment risk by putting half your investment in the China Light and Power Company (CLP). The following table shows a sample of the annual returns to HSBC (X) and CLP (Y) for the last seven months. Year (2016) Monthly returns of HSBC, x, (in %) 6.2735 6.6706 -9.4632 3.0562 -2.7877 -5.9793 -0.6489 Table 3 Monthly returns of China Light and Power (CLP), y; (in %) Jan Feb Mar Apr May Jun Jul (a) Calculate the sample variance of X and Y. (3 points) -1.0955 -0.6260 -0.7076 1.1867 3.6863 3.6814 5.5678 (b) Calculate the sample covariance and the sample correlation of X and Y. (4 points) (c) Do you think buying HSBC and CLP simultaneously can effectively diversify the risk? Explain your answer. (3 points)

Answer rating: 100% (QA)

ANSWER a To calculate the sample variance of X and Y we can use the formula Sample variance of X xi x n1 where xi is the monthly return of HSBC x is t... View the full answer