Question

Question 3 (total of 20 marks): Refer to the below table to answer the questions that follow. Assume that returns are effective annual rates Year Return on Stock A Return on Market 2007 35% 15% 2008 -35% -25% 2009 15% 40% Question 3a (1 marks): What is stock A's expected return? Question 3b (1 marks): What is the market's expected return? Question 3c (4 marks): What is the sample standard deviation of stock A's returns? buestion 3d (4 marks): What is the sample standard deviation of the market portfolio's returns? 3e (4 marks): What is the covariance of stock A's returns with the market portfolio? Question 3f (2 marks): What is the correlation of returns between stock A and the market? Question 3g (2 marks): What is the beta of stock A? Question 3h (2 marks): What is the diversifiable variance of stock A?

Answer 1

3a. Stock A's Expected Return =(Return 2007 +Return 2008+Return 2009)/3 =(35%-35%+15%)/3 =5%
3 b. Market's expected return =(15%-25%+40%)/3 =10%
3 c. Sample Standard deviation of Stock A =(((35%-5%)^2+(-35%-5%)^2+(15%-5%)^2)/(3-1))^0.5 =36.06%
3d. Sample Standard deviation of Market =(((15%-10%)^2+(-25%-10%)^2+(40%-10%)^2)/(3-1))^0.5=32.79%