Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

DEAR TUTOR:could you help explain the question d and e ,thank you ,feel so confuse! Part A: RISK AND RETURN (30 marks) Use historical prices

DEAR TUTOR:could you help explain the question d and e ,thank you ,feel so confuse!

Part A: RISK AND RETURN (30 marks) Use historical prices of the Australia market index All Ordinaries (^AORD) and the following four companies traded in the Australian market: Rio Tinto plc (RIO), BHP Billiton Ltd. (BHP.AX), ANZ Ltd. (ANZ. AX) and Wesfarmers Ltd. (WES) provided on CloudDeakin, answer the following questions:

a. Compute continuously compounded monthly return of the above stocks and index using adjusted Close Price (Adj Close) (5 marks). Hint: Use Excel function ln to compute the compounded monthly return.

b. Compute monthly and yearly expected return for the above stocks and index under the assumption of equal probabilities for all possible returns (5 marks).

c. Compute return correlation coefficient between two stocks and between each stock and the market index. Which pair of stocks has the highest and lowest correlation? Which stock(s) has the highest and lowest correlations with the market? (5 marks) Hint: Use Excel function CORREL() to compute the correlation coefficient between two data series.

d. Can you suggest some economic reasons to explain for the high and low correlation between stocks in (c)? If you were to form a portfolio of 2 stocks, which ones would you choose to maximise the benefit of diversification? Give reasons for your answer. ( 6 marks)

e. Assume

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Markets and Institutions

Authors: Jeff Madura

12th edition

9781337515535, 1337099740, 1337515531, 978-1337099745

More Books

Students also viewed these Finance questions