tock A and Stock B have the following historical returns: Year Stock A’s Returns, Stock B’s Returns, 1 –10.00% –23.00% 2 18.50 21.29 3 38.67 44.25 4 14.33 3.67 5 33.00 28.30 Calculate the average rate of return for each stock during the period given in the table. Assume that someone held a portfolio consisting of 50 percent Stock A and 50 percent Stock B. What would have been the realized rate of return on the portfolio in each year? What would have been the average return on the portfolio during this period? Calculate the standard deviation of returns for each stock and for the portfolio. Looking at the annual returns data on the two stocks, would you guess that the correlation coefficient between returns on the two stocks is closer to +0.9 or to –0.9?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 13P

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Stock A and Stock B have the following historical returns:

Year Stock A’s Returns, Stock B’s Returns,

1 –10.00% –23.00%

2 18.50 21.29

3 38.67 44.25

4 14.33 3.67

5 33.00 28.30

Calculate the average rate of return for each stock during the period given in the table. Assume that someone held a portfolio consisting of 50 percent Stock A and 50 percent Stock B. What would have been the realized rate of return on the portfolio in each year? What would have been the average return on the portfolio during this period?
Calculate the standard deviation of returns for each stock and for the portfolio.
Looking at the annual returns data on the two stocks, would you guess that the correlation coefficient between returns on the two stocks is closer to +0.9 or to –0.9?
If you added more stocks at random to the portfolio, which of the following statements most accurately describes what would happen to σ_p?

σ_p would remain constant.
σ_p would decline to somewhere in the vicinity of 15 percent.
σ_p would decline to zero if enough stocks were included.

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