Using File COS, assuming that a third stock, Stock C, is available for inclusion in the portfolio. Stock C has the following historical returns:

 

a. Calculate (or read from the computer screen) the average return, standard deviation, and coefficient of variation for Stock C.

b. Assume that the portfolio now consists of 33.33 percent Stock A, 33.33 percent Stock B, and 33.33 percent Stock C. How does this composition affect the portfolio return, standard deviation, and coefficient of variation versus when 50 percent was invested in A and in B?

c. Make some other changes in the portfolio, making sure that the percentages sum to 100 percent. For example, enter 25 percent for Stock A, 25 percent for Stock B, and 50 percent for Stock C. (Note that the program will not allow you to enter a zero for the percentage in Stock C.) Notice that the, remains constant and that exchanges. Why do these results occur?

d. In Problems 8-23, the standard deviation of the portfolio decreased only slightly because Stocks A and B were highly positively correlated with one another. In this problem, the addition of Stock C causes the standard deviation of the portfolio to decline dramatically, even though σC = σA = σB. What does this change indicate about the correlation between Stock C and Stocks A and B?

e. Would you prefer to hold the portfolio consisting only of Stocks A and B or a portfolio that also included Stock C? If others react similarly, how might this fact affect the stocks’ prices and rates of return?

Year 2004 2005 2006 2007 2008 Stock C's Return, re 32.00% -11.75 10.75 32.25 -6,75