Question

Please show all work and clear steps as to how you got each solution!!

Stocks A and B have the following historical returns: Year Stock A's returns Stock B's returns 2003 -19.00% - 15.50% 2004 32.00% 23.80% 2005 14.00% 29.50% 2006 -0.50% -8.60% 2007 28.00% 25.30% (a) Calculate the average rate of return and standard deviation of returns (as percents) for each stock during the 5-year period. (Round your standard deviations to two decimal places.) stock A average rate of return standard deviation stock B average rate of return standard deviation (b) Assume that someone held a portfolio consisting of 50% of stock A and 50% of stock B and that the average annual realized returns and past volatility of each stock are unbiased estimators of their expected returns and future volatility. What is the portfolio's expected return and the volatility of next year's returns (as percents)? The correlation between the returns of the two stock is 89%. (Round your answers to two decimal places.) expected return volatility

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

| 0 = a = 3 3 4 5 ? v 1 ENG 02:33 15-02-2020 26 QH QI Q QK QL QM QN o QF167 - X fix 2 QE QFQG 166 167 168 RETURNS -19 32 14 E(A) = 10.9 (A-E(A))^2 894.01 445.21 9.61 129.96 292.41 1771.2000 (A-E(A))^2 E(B) = 10.9 (B-E(B))^2 696.96 166.41 345.96 380.25 207.36 1796.9400 (B-E(B))^2 -15.5 23.8 29.5 -8.6 25.3 54.5 10.90 [54.5/5] 177 178 179 180 a 181 -0.5 28 54.5 10.90 [54.5/5] TOTAL RETURN AVERAGE RATE OF RETURN 182 VARIANCE VARIANCE VARIANCE (A-E(A))^2/(n-1) 1771.20/4 442.8000 (B-E(B))^2/ (n-1) 1796.40/4 449.2350 n = NO OF OBSERVATIONS 183 184 185 186 187 b 188 189 STANDARD DEVIATION SQRT(VARIANCE) 21.0428 21.04 21.1952 21.20 [ROUNDED TO 2 DECIMALS] ... EMV MEAN STDV assignment DEAR prob sd COV TIME SERIES corr REGRESSION range CAMERA TREND freq INTERVAL, NORMAL MATRIX ... 1

Alle 9 W ? v 1 ENG 02:34 15-02-2070 27 fix QM210 - QE 190 191 X QF QG QH QI a QK QL QM QN o 50% WA = WB = 50% EXPECTED RETURN ON PORTFOLIO E(Rp): RA = RB= 10.90% 10.90% E(Rp) = WARA + WB*RB = 0.50*(10.90%) + 0.50(10.90%) = 10.90% 197 STANDARD DEVIATION OF THE PORTFOLIO 198 199 200 201 SDA = 21.0428% 89.00% 0.89 SDB = 21.1952% PORTFOLIO SD = SQRT ((WA)^2*(SDA)^2 + (WB)^2*(SDB)^2 + 2 WA*WB*(SDA)*(SDB)* (r )) PORTFOLIO SD = SQRT ((0.50)^2* (21.0428)^2 + (0.50)^2* (21.1952)^2 + 2 *0.50*0.50*(21.0428)* (21.1952)* (0.89)) PORTFOLIO SD = 20.53% 202 205 206 207 208 209 210 211 212 213 ... EMV MEAN STDV assignment DEAR prob sd COV TIME SERIES corr REGRESSION range CAMERA TREND freq INTERVAL, NORMAL MATRIX ...