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P 6-07 The following are monthly percentage price changes for four market indexes. Month DJIA S&P 500 Russell 2000 Nikkei 1 0.02 0.01 0.05 0.05

P 6-07

The following are monthly percentage price changes for four market indexes.

Month DJIA S&P 500 Russell 2000 Nikkei
1 0.02 0.01 0.05 0.05
2 0.08 0.07 0.12 -0.02
3 -0.02 -0.02 -0.03 0.09
4 0.01 0.02 0.02 0.02
5 0.05 0.03 0.14 0.02
6 -0.07 -0.02 -0.10 0.05

Compute the following.

  1. Average monthly rate of return for each index. Round your answers to five decimal places.

    DJIA:

    S&P 500:

    Russell 2000:

    Nikkei:

  2. Standard deviation for each index. Do not round intermediate calculations. Round your answers to four decimal places.

    DJIA:

    S&P 500:

    Russell 2000:

    Nikkei:

  3. Covariance between the rates of return for the following indexes. Use a minus sign to enter negative values, if any. Do not round intermediate calculations. Round your answers to six decimal places.

    Covariance (DJIA, S&P 500):

    Covariance (S&P 500, Russell 2000):

    Covariance (S&P 500, Nikkei):

    Covariance (Russell 2000, Nikkei):

  4. The correlation coefficients for the same four combinations. Use a minus sign to enter negative values, if any. Do not round intermediate calculations. Round your answers to four decimal places.

    Correlation (DJIA, S&P 500):

    Correlation (S&P 500, Russell 2000):

    Correlation (S&P 500, Nikkei):

    Correlation (Russell 2000, Nikkei):

  5. Using the unrounded answers from parts (a), (b), and (d), calculate the expected return and standard deviation of a portfolio consisting of equal parts of (1) the S&P and the Russell 2000 and (2) the S&P and the Nikkei. Do not round intermediate calculations. Round your answers to five decimal places.

    Expected return (S&P 500 and Russell 2000):

    Standard deviation (S&P 500 and Russell 2000):

    Expected return (S&P 500 and Nikkei):

    Standard deviation (S&P 500 and Nikkei):

    Since S&P 500 and Russell 2000 have a strong -Select-negative OR positive correlation, meaningful reduction in risk -Select-is not observed OR is observed if they are combined.

    Since S&P 500 and Nikkei have a strong -Select-negative OR positive correlation, meaningful reduction in risk -Select-is not observed OR is observed if they are combined.

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