Problem 6-07

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

Month	DJIA	S&P 500	Russell 2000	Nikkei
1	0.03		0.03		0.03		0.03
2	0.06		0.05		0.08		-0.01
3	-0.03		-0.01		-0.03		0.05
4	0.01		0.04		0.04		0.01
5	0.04		0.03		0.10		0.01
6	-0.05		-0.06		-0.08		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:

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

DJIA:

S&P 500:

Russell 2000:

Nikkei:

1. 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):

1. 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):

1. 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 negative positive Item 21 correlation, meaningful reduction in risk -Select-is not observed is observed Item 22 if they are combined.

Since S&P 500 and Nikkei have a strong negative positive Item 23 correlation, meaningful reduction in risk -Select-is not observed is observed Item 24 if they are combined.