Go to finance.yahoo.com and find the monthly rates of return over a 2 year period for five companies of your choice. Now assume you form each month an equally weighted portfolio of the five firms.

What is the rate of return each month on your portfolio?

Compare the Standard deviation of the monthly portfolio return to that of each firm and to the average standard deviation across the five firms. What do you conclude about portfolio diversification?

Return to the monthly returns of the five companies you chose in the previous questions

a: Using the excel functions for average and sample standard deviation.. Calculate the average and the standard deviation of the returns for each of the firm.

b: Using excel's correlation function, find the correlations between each pair of five stocks. What are the highest and lowest correlations?

c: Try finding correlations between pairs of stocks in the same industry. Are the correlations higher than those you found in part b? Is this surprising?