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Please just answer the questionb. Thank you very much! 0.07 2 3 4. (a) The following are monthly percentage price changes for two market indexes

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Please just answer the questionb. Thank you very much!

0.07 2 3 4. (a) The following are monthly percentage price changes for two market indexes Month DJIA S&P 500 1 0.03 0.02 0.06 -0.02 -0.01 0.01 0.03 5 0.05 0.04 -0.06 -0.04 0) Compute the monthly standard deviation for each index. Compute the covariance between the rates of return for the DJIA and the S&P 500 What is the correlation coefficient? What does it mean? (4+4+4=12 marks) (1) (b) Consider the following data for two risk factors (1 and 2) and two securities (J and L): 1, -0.05, 1, -0.02, 1, =0.04, 6, =0.80, , =1.40, . =1.60, 0, -2.25 0 (11) Use APT to compute the expected returns for both securities. Fully show your working out Suppose that Security J is currently priced at $22.50 while the price of Security Lis $15.00. Further, it is expected both securities will pay a dividend of $0.75 during the coming year. What is the expected price of each security one year from now? (4+4=8 marks) () Fully showing your working out, derive the portfolio standard deviation for a two- security portfolio where one security is cash

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