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The following table contains monthly returns for Cola Co. and Gas Co. for 2010 (the returns are shown in decimal form, i.e., 0.035 is 3.5%).
The following table contains monthly returns for Cola Co. and Gas Co. for 2010 (the returns are shown in decimal form, i.e., 0.035 is 3.5%). Using this table and the fact that Cola Co. and Gas Co. have a correlation of - 0.0969, calculate the volatility (standard deviation) of a portfolio that is 55% invested in Cola Co. stock and 45% invested in , % Gas Co. stock. Calculate the volatility by: a. Using the formula: - X Var(Re) = w; SD (R,)2 + w? SD (R2) + 2W,W2 Corr (R..R2) SD (RA) SD (R2) b. Calculating the monthly returns of the portfolio and computing its volatility directly. c. How do your results compare? Data table Month Gas Co. Cola Co. -0.0210 0.0000 0.0280 January February March a. Using the formula: -0.0050 -0.0200 -0.0180 0.0280 April 0.0090 Var(Re) =w? S0(R) 2 +w2 SD (R2) +2W,W2 Corr (R..R2) SD (R4) S0(R2) The volatility (standard deviation) of the portfolio is%. (Round to two decimal places.) b. Calculating the monthly returns of the portfolio and computing its volatility directly The volatiltiy (standard deviation) of the portfolio is %. (Round to two decimal places.) May -0.0310 0.0840 June -0.0840 -0.0460 - 0.1190 0.0820 -0.0160 0.0460 C. How do your results compare? (Select the best choice below.) July August September October 0.0550 0.0300 0.0140 -0.0110 November -0.0380 0.0290 O A. This cannot be determined from the information given. B. The portfolio volatility calculated using the Var(Rp) formula in part (a) is much smaller than the portfolio volatility calculated used the monthly portfolio returns. OC. The two portfolio volatilities, calculated using the Var(Rp) formula in part (a) and using the monthly portfolio returns, are the same or almost the same. OD. The portfolio volatility calculated using the Var(Rp) formula in part (a) is much larger than the portfolio volatility calculated used the monthly portfolio returns December -0.0220 0.0740
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