INSTRUCTIONS This assignment focuses on the annual return gaps and the correlations between the returns of large and small capitalization stocks, and between corporate bonds and government bonds. To complete this assignment, you will need to: Download the Gaps Data Excel document located on the course assignment page. Complete the questions listed below. Submit the assignment by the due date listed in the course. QUESTIONS Context In the Gaps Data Excel document, you have annual returns of large capitalization stocks and small capitalization stocks, and annual returns of corporate bonds and government bonds during 1926-2019. The correlation between the annual returns of large capitalization stocks and small capitalization stocks during 1926-2019 was 0.79. The correlation between the annual returns of corporate bonds and government bonds during 1926-2019 was 0.89 An annual return gap is an absolute value of the difference between the annual returns of two investments (i.e. without regard to which is higher and which is lower). Question 1: Think about the gap between the returns of large and small stocks in a typical year. What is your estimate of the typical return gap? Use your intuition for the estimate. You do not need to justify it. Higher than 6 percentage points Between 3 and 6 percentage points Between 1 and 3 percentage points Lower than 1 percentage point a) Calculate the actual return gap between the returns of large and small capitalization stocks for each year 1926-2019. b) What are the mean and median actual annual return gaps? c) How similar are the actual mean and median return gaps to your estimate of typical return gaps? d) Calculate the standard deviations of the returns of large capitalization and small capitalization stocks during 1926-2019. Question 2: Think about the gap between the returns of corporate and government bonds in a typical year. What is your estimate of the typical return gap? Use your intuition for the estimate. You do not need to justify it. Higher than 6 percentage points Between 3 and 6 percentage points Between 1 and 3 percentage points Lower than 1 percentage point a) Calculate the actual return gap between the returns of corporate and government bonds for each year 1926-2019. b) What are the mean and median actual annual return gaps? c) How similar are the actual mean and median return gaps to your estimate of typical return gaps? d) Calculate the standard deviations of the returns of corporate bonds and government bonds during 1926- 2019. Question 3: The correlation between the returns of corporate and government bonds was 0.89, higher than the 0.79 correlation between large and small capitalization stocks. But the mean and median gaps between the returns of corporate and government bonds are smaller than the mean and median gaps between large and small capitalization stocks. Compare the usefulness of correlations as indicators of the benefits of diversification to the usefulness of