The following information relates to the prices and dividends of two stocks listed on the Ghana Stock Exchange as well as the average market returns.   Stock A Stock B   Year Price Div Price Div Market Returns 2011 20 0 11 0 0 2012 24 1.2 13 1.6 0.25 2013 26 0.5 17 0.5 0.18 2014 31 1 20 0.9 0.11 2015 33 1.5 23 1.2 0.12 2016 40 2 27 1.5 0.15   Required. 1. Calculate the annual returns for each stock (2012-2016)   2.Calculate the average returns for each of the stocks and the market   3.Calculate the covariance between the stocks   4.Assuming the two stocks are equally weighted, calculate the portfolio return and portfolio risk

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter2: The Domestic And International Financial Marketplace
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The following information relates to the prices and dividends of two stocks listed on the Ghana Stock Exchange as well as the average market returns.

 

Stock A

Stock B

 

Year

Price

Div

Price

Div

Market Returns

2011

20

0

11

0

0

2012

24

1.2

13

1.6

0.25

2013

26

0.5

17

0.5

0.18

2014

31

1

20

0.9

0.11

2015

33

1.5

23

1.2

0.12

2016

40

2

27

1.5

0.15

 

Required.

1. Calculate the annual returns for each stock (2012-2016)

 

2.Calculate the average returns for each of the stocks and the market

 

3.Calculate the covariance between the stocks

 

4.Assuming the two stocks are equally weighted, calculate the portfolio return and portfolio risk

Expert Solution
Step 1
Portfolio risk = {(Weight of Stock A * standard deviation of Stock A)^2 + (Weight of Stock B * standard deviation of Stock B)^2 + 2 * Weight of Stock B * standard deviation of Stock B * Weight of Stock A * standard deviation of Stock A * Correlation coefficient} ^(1/2)
Portfolio return = (Return off Stock A * Weight of Stock A) + (Return off Stock B * Weight of Stock B)
Correlation coefficient = Covariance of Stock A & B / (Standard deviation of Stock A * Standard deviation of Stock B)
The covariance of two stocks = {(Return of stock A - Average return of stock A) * (Return of stock B - Average return of stock B)} / Number of Years
Holding period return = {Dividend (year 1) + (Price 1 - Price 0)} / Price 0
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