Question 3

You have the following 6 years of data covering share A and the Market Portfolio

The standard deviation of share A is 3.65 The standard deviation of the market portfolio is 6.85 The covariance of A with the market is 17.5

(i) Calculate for each of the above years, the yearly returns of a portfolio created by allocating your money 40% between share A and 60% the market portfolio.

(ii) Calculate the average expected rate of return and standard deviation of a portfolio made up of 40% share A and 60% in the market portfolio.

(iii) Calculate the beta of stock A. What does the beta reveal about the defensive or aggressive qualities of stock A?

Year 2015 2016 2017 2018 2019 2020 Share A 7% 4% 6% 1% -3% 4% Market Portfolio 9% 2% 15% 5% -4% 15%