Question

Here are the returns on two stocks. Digital Cheese Executive Fruit January February March +18 +6 -2 +2 +4 +5 April Мay +15 +6 -3 +2 June +3 +7 July August -1 -2 -7 -1 Required: a-1. Calculate the variance and standard deviation of each stock. a-2. Which stock is riskier if held on its own? b. Now calculate the returns in each month of a portfolio that invests an equal amount each month in the two stoc c. Isthe variance more or less than halfway between the variance of the two individual stocks? Complete this question by entering your answers in the tabs below. Req A1 Req A2 Req B Req C Now calculate the returns in each month of a portfolio that invests an equal amount each month in the two stocks. (Neqative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers decimal places.) Portfolio Month Return January February March April May June July August

Calculate the variance and standard deviation of each stock

Calculate portfolio returns from each month

Answer 1

(A) Portfolio return = (Stock A Return)*(Weight of Stock A)+(Stock B Return)*(Weight of Stock B)

There could be two interpretations of the given part.

1^st => The amount invested in the portfolio is assumed to be withdrawn each month. In other words, the portfolio return is calculated as if it is not related to the previous month.

Assuming $ 100 is invested in each of the stocks.

Month	Return Stock A	Return Stock B	Amount invested in A	Amount invested in B	Portfolio Return
Jan	18%	6%	100	100	12.00%
Feb	-2%	2%	100	100	0.00%
Mar	4%	5%	100	100	4.50%
Apr	6%	15%	100	100	10.50%
May	-3%	2%	100	100	-0.50%
Jun	3%	7%	100	100	5.00%
Jul	-1%	-2%	100	100	-1.50%
Aug	-7%	-1%	100	100	-4.00%

2^nd => The amount invested in the portfolio is not withdrawn each month and therefore returns are computed on a cumulative basis.

Assuming $ 100 is invested in each of the stocks.

Month	Return Stock A	Return Stock B	Opening Investment A	Opening Investment B	Additions in A	Additions in B	Return Yielded A	Return Yielded B	Portfolio Return
	A	B	C	D	E	F	G=(C+E)*(1+A)	H=(D+F)*(1+B)	=(G+H)/(C+D+E+F)*100
Jan	18%	6%	-	-	100	100	118.00	106.00	12.00%
Feb	-2%	2%	118.00	106.00	100	100	213.64	210.12	-0.06%
Mar	4%	5%	213.64	210.12	100	100	326.19	325.63	4.50%
Apr	6%	15%	326.19	325.63	100	100	451.76	489.47	10.50%
May	-3%	2%	451.76	489.47	100	100	535.20	601.26	-0.42%
Jun	3%	7%	535.20	601.26	100	100	654.26	750.35	5.10%
Jul	-1%	-2%	654.26	750.35	100	100	746.72	833.34	-1.53%
Aug	-7%	-1%	746.72	833.34	100	100	787.45	924.01	-3.85%