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You have observed the following returns over time: Year Stock X Stock Y T-5 T-4 T-3 T-2 T-1 0.14 0.19 -0.16 0.03 0.20 0.20

You have observed the following returns over time: Year Stock X Stock Y T-5 T-4 T-3 T-2 T-1 0.14 0.19 -0.16 0.03 0.20 0.20 0.05 -0.05 0.01 0.11 (a) Calculate the average returns for stocks X and Y. (b) Calculate the variances and standard deviations for stocks X and Y. (c) Calculate the covariance between stocks X and Y. What is the correlation coef- ficient? (d) Assuming you invest 50% of your wealth in stock X and 50% in stock Y, what is the return on the new portfolio you formed? (e) Calculate the standard deviation of the portfolio.

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To calculate the average returns for stocks X and Y we sum up the returns and divide by the number of observations Average return of stock X 014 019 016 003 020 5 008 Average return of stock Y 020 005 ... blur-text-image

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