Question
Use the end of year price, dividend data (dividend paid during year), and annual returns provided below for the common stocks of Norvell and Napier
Use the end of year price, dividend data (dividend paid during year), and annual returns provided below for the common stocks of Norvell and Napier to respond to part A through F.
a. Compute the annual returns for 2017 through 2021 (e.g., each year's return) of an equally weighted portfolio of Norvell stock and Napier stock.
b. Provide an intuitive explanation of what the correlation coefficient between the returns of the two securities measures. Comment on whether you would expect the typical correlation coefficient between two stocks to be positive, negative, or around zero, and why in either case.
c. Compute the covariance between the returns of Norvell stock and Napier stock.
d. Now compute the correlation between the Norvell and Napier stocks and indicate how this relates to the covariance in part B.
e. You must now compute the standard deviation of the annual returns on the portfolio described in part A using two methods. For part E, use the actual annual returns of the equally weighted portfolio calculated in part A to calculate the portfolio standard deviation.
f. For part F, use the equation for the variance of a 2-asset portfolio that includes the security weights, the variances of each of the securities, and the covariance between the returns of the two securities. How do your answers compare?
Estimated Norvell=17.72% Estimated Napier=21.15% Estimated Norvell=17.72% Estimated Napier=21.15%
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