Problem 3

Please go to Yahoo! Finance (http://finance.yahoo.com) and download SQ (Square) and JD (JD.com) daily stock prices in 2019. Please complete this question in Excel and upload the Excel file with all formulas.

a.Calculate their daily returns in 2019;

The daily return = (Day T Return - Day T-1 Return)/ Day T-1.

b.Estimate the average return, return variance and return volatility for both stocks;

For Square, the daily average return is0.00066028, the daily return variance is 0.00069417, and the daily return volatility is 0.02634713. The annualized return for 2019 is 0.1657, the annualized return variance for 2019 is 0.1735, and the annualized return volatility for 2019 is 0.4166.

For JD, the daily average return is 0.00234115, the daily return variance is 0.00061222, and the daily stock volatility is 0.02474305. The annualized return for 2019 is 0.5853, the annualized return variance for 2019 is 0.1531, and the annualized return volatility is 0.3912.

c.Estimate the correlation between these two stocks;

d.Construct a portfolio consisting of 50% of each stock. What's the portfolio's Sharpe ratio? Compare it to the Sharpe ratio of each stock.

(Hint: you can use the 1-year T-bill rate, or any other similar treasury rate from various sources, as an approximation of the risk-free rate.)

e.Finally, find the betas of the two stocks from Yahoo! Finance. What are the expected returns of the two stocks and the portfolio, assuming a risk-free rate of 1% and an expected market return of 8%?