1. Download monthly data on prices and dividends from finance.yahoo.com from January 1 2011 to January 1 2013 for McDonalds Corporation (NYSE:MCD) and Yum! Brands, Inc. (NYSE:YUM), for the period. Assume that you trade at the close price and that all dividends are only available to you on the first trading day of the month after they are paid. For instance, the dividend paid on July 11, 2012 is not available to you until the first trading day in August 2012.

(a) Calculate the monthly return on each stock for each month in 2011 and 2012.

(b) Using these returns, calculate the following:

i. The expected monthly return on each stock ii. The variance of the monthly return on each stock

iii. The standard deviation of the monthly return on each stock iv. The covariance between the two stocks

v. The correlation between the two stocks

(c) Given your calculations of expected return, variance, and covariance above, cal- culate the expected return and the standard deviation of return for the following portfolios of MCD and YUM. Please do this question without first calculating each portfolio return in each month. Rather, use the formulas for expected return and variance of return of a portfolio given the statistics of the individual assets.

Weight in MCD Weight in YUM

-1 2

0 1

0.25 0.75

0.5 0.5

0.75 0.25

1 0

2 -1

(d) Plot the expected return of these portfolios as a function of their standard de- viation. In Excel, use an X-Y or Scatter plot, and put Expected Return (the 7 values calculated above) on the Y axis and Standard Deviation on the X-axis.