Problem 7 (For this problem you need to consult the Excel material from Lecture 8)

Go to Yahoo! Finance. Download monthly stock prices for MGM, ^GSPC, and GS from Jan. 2009 to Jan. 2016.

a) For each of the three assets and each month in our time period, compute monthly returns based on the adjusted closing price and average monthly returns (Excel function AVERAGE).

b) For each asset, compute the standard deviation (Excel function STDEV) of monthly returns and, based on this number, compute the annualized standard deviation.

c) Compute correlations (Excel function CORREL) of monthly returns between MGM and ^GSPC, between GS and the ^GSPC, and between MGM and GS.

d) Using the formula for the standard deviation of a two-asset portfolio and the values computed in parts (b) and (c), compute the monthly and annualized standard deviations of a portfolio invested 25% in MGM and 75% in GS.

e) For each month in our sample period, compute monthly returns for a portfolio consistently invested 25% in MGM and 75% in GS (i.e. wMGM = 0.25 and wGS = 0.75). Next, find the monthly

standard deviation of returns on this portfolio over our time period by using the Excel function STDEV. Find the annualized standard deviation of the portfolio returns and verify that your answers are the same as in part (d).