Question
The following table contains monthly returns for Cola Co. and Gas Co. for 2013 (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 2013 (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 0.6084, 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:
VarRp=w21SDR12+w22SDR22+2w1w2CorrR1,R2SDR1SDR2
b.
Calculating the monthly returns of the portfolio and computing its volatility directly.
c.
How do your results compare?
\begin{tabular}{crr} Month & Cola Co. & Gas Co. \\ \hline January & 0.1084 & 0.0600 \\ February & 0.0236 & 0.0128 \\ March & 0.0660 & 0.0186 \\ April & 0.0201 & 0.0190 \\ May & 0.1836 & 0.0740 \\ June & 0.0122 & 0.0026 \\ July & 0.0225 & 0.0836 \\ August & 0.0689 & 0.0246 \\ September & 0.0604 & 0.0200 \\ October & 0.1361 & 0.0000 \\ November & 0.0351 & 0.0468 \\ December & 0.0054 & 0.0222 \\ \hline \end{tabular} \begin{tabular}{crr} Month & Cola Co. & Gas Co. \\ \hline January & 0.1084 & 0.0600 \\ February & 0.0236 & 0.0128 \\ March & 0.0660 & 0.0186 \\ April & 0.0201 & 0.0190 \\ May & 0.1836 & 0.0740 \\ June & 0.0122 & 0.0026 \\ July & 0.0225 & 0.0836 \\ August & 0.0689 & 0.0246 \\ September & 0.0604 & 0.0200 \\ October & 0.1361 & 0.0000 \\ November & 0.0351 & 0.0468 \\ December & 0.0054 & 0.0222 \\ \hline \end{tabular}Step by Step Solution
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