Collect data on the closing stock prices of Alcoa (AA) and IBM (IBM) for the last three months

(a possible source is Yahoo!Finance). Input them in EXCEL and do the following analyses (you might also want to read the appendix to this chapter):

a. Compute the rates of return, variances, and standard deviations of each stock and interpret their values.

b. Compute the covariance and correlation between the two stocks and interpret the values.

c. Form a two-stock portfolio and compute its rate of return and risk (for risk, compute a new column of returns found by averaging the daily returns of each stock, since you assume equal weights, and compute the standard deviation of that column). Assume equal weights for the computation of the portfolio’s return also. Interpret your findings.

d. Assume that the risk-free rate is 0.08%, on average, during that period. Assume that you place 30% of your funds in T-bills. Compute your overall portfolio’s return and risk and interpret the results.

e. Finally, graph the capital allocation line (CAL) and discuss its shape.