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a) Suppose we form a portfolio invested equally in Apple (AAPL) and Google (GOOG) stocks. Cells B3:C5 in the spreadsheet below, display the mean return,
a) Suppose we form a portfolio invested equally in Apple (AAPL) and Google (GOOG) stocks. Cells B3:C5 in the spreadsheet below, display the mean return, variance, and standard deviation of the Apple and Google returns, respectively. Cell B6 reports the covariance between the two assets, whereas Cell B8 indicates the portfolio weight of Apple: D Calculating the Mean, Variance and St. Deviation of a Portfolio 2 Asset returns AAPL GOOG 3 Mean return 3.54% 0.40% Variance 0.0256 0.0154 5 Standard deviation 16.00% 12.41% 6 Covariance 0.0030 8 Proportion of AAPL 0.5 10 Portfolio mean return 11 Portfolio return variance 12 Portfolio return standard deviation 13 i) Compute the mean and variance of this portfolio, as well as its standard deviation (Cells B10:B12). Show your calculations in detail. [24 marks] b) Estimation of the regression model Y=B,+B2X+u yields Y, =10.3+0.409X, T =36 (12.28) (0.3561) "+ = 10.3 + 0.409xt, T = 36where 7 is the number of observations and the numbers in parentheses are the standard errors of the respective estimators. You wish to test the hypothesis Ho Ho : B1 = 2. B2=1 versus a two-sided alternative hypothesis. i) Write down the alternative hypothesis. [2 marks] ii) Form and interpret a 95% confidence interval for the , coefficient using the figures above. You can find the t-test's critical values in the Table in the Appendix at the end of the exam paper
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