Question
QUESTION THREE ( 5 Points) You have the following investments, which contain variability of risk that is used by financial analysts. Investment A Investment B
QUESTION THREE ( 5 Points)
- You have the following investments, which contain variability of risk that is used by financial analysts.
| Investment A | Investment B |
|
Expected Return | 0.07 | 0.12 |
|
Standard Deviation | 0.05 | 0.07 |
|
Required:
- Compare between the two investment and show which investment is riskier, justify your answer
- Calculate the covariance (CV) for both investments?
(b) During the past year, you had a portfolio that contained U.S. government T-bills, long-term government bonds, and common stocks. The rates of return on each of them were as follows:
U.S. government T-bills 5.50%
U.S. government long-term bonds 7.50
U.S. common stocks 11.60
During the year, the consumer price index, which measures the rate of inflation, went from 160 to 172 (19821984 100). Compute the rate of inflation during this year. Compute the real rates of return on each of the investments in your portfolio based on the inflation rate.
- You have the following monthly percentage price changes for the four market indexes:
Month | DJIA | S&P 500 | Russel 2000 | NIKKEL |
1 | 0.03 | 0.02 | 0.04 | 0.04 |
2 | 0.07 | 0.06 | 0.10 | -0.02 |
3 | -0.02 | -0.01 | -0.04 | 0.07 |
4 | 0.01 | 0.03 | 0.03 | 0.02 |
5 | 0.05 | 0.04 | 0.11 | 0.02 |
6 | -0.06 | -0.04 | -0.08 | 0.06 |
Compute the following:
- Expected monthly rate of return of each one
- Standard deviation for each one
- Covariance between the rate of return for the following indexes
DJIA S&P 500
S&P 500 Russel 2000
S&P 500 NIKKEL
Russel 2000 NIKKEL
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