Question

Using the data in the following table, estimate the:

a. Average return and volatility for each stock 

b. Correlation between these two stocks. 

c. The average return of stock A is %. 

Year	2010	2011	2012	2013	2014	2015
Stock A	-13%	20%	9%	-6%	1%	10%
Stock B	21%	33%	45%	-8%	-7%	33%

Answer 1

	Stock A
Year	AR	ER = Avg. R	(AR-ER)	(AR-ER)^2
2010	-13	3.5	-16.5	272.25
2011	20	3.5	16.5	272.25
2012	9	3.5	5.5	30.25
2013	-6	3.5	-9.5	90.25
2014	1	3.5	-2.5	6.25
2015	10	3.5	6.5	42.25
Average =	3.5			713.5
	Stock B
Year	AR	ER = Avg. R	(AR-ER)	(AR-ER)^2
2010	21	19.5	1.5	2.25
2011	33	19.5	13.5	182.25
2012	45	19.5	25.5	650.25
2013	-8	19.5	-27.5	756.25
2014	-7	19.5	-26.5	702.25
2015	33	19.5	13.5	182.25
Average =	19.5			2475.5
Average return of A=						3.5
Average return of B =						19.5
Volatility (Std Dev. Of A) =			SQRT((∑(AR-ER)^2) / (n-1))			11.94571
			sQRT(713.5 / (6-1))
Volatility (Std Dev. Of B) =			sQRT(2475.5 / (6-1))			22.25084
(b)
Covariance between stock
Year	Stock A (AR - ER)		Stock B (AR-ER)		Stock A (AR - ER) * Stock B (AR-ER)
2010	-16.5		1.5		-24.75
2011	16.5		13.5		222.75
2012	5.5		25.5		140.25
2013	-9.5		-27.5		261.25
2014	-2.5		-26.5		66.25
2015	6.5		13.5		87.75
					753.5
Covariance = 753.5 / (6-1)					150.7
(c )
Correlation = Covariance between stock / (Std. dev. Of A * std. dev. Of B)
	150.7 / (11.94571 * 22.25084)
	0.566963
So, Correlation between two stock is 0.57.