Question
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
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