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You are considering an investment in the stock market and have identified two potential stocks (XYZ and ABC) to purchase. The historical returns for the past five years are shown in the table below. Year 2000 2001 2002 2003 2004 XYZ Returns 11% 15% 21% 9% 13% ABC Returns 25% 12% 19% 13% 8%

You are considering an investment in the stock market and have identified two potential stocks (XYZ and ABC) to purchase. The historical returns for the past five years are shown in the table below. Year 2000 2001 2002 2003 2004 XYZ Returns 11% 15% 21% 9% 13% ABC Returns 25% 12% 19% 13% 8%

Intermediate Financial Management (MindTap Course List)
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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7. You are considering an investment in the stock market and have identified two potential stocks (XYZ and ABC) to purchase. The historical returns for the past five years are shown in the table below. i. ii. iii. iv. V. Year 2000 11% 25% 2001 15% 12% 2002 21% 19% 2003 9% 13% 2004 13% 8% Calculate the average return and standard deviation of returns for each stock over the past five years. Based on this information alone, which stock would you prefer to own? Would everybody make the same choice? Calculate the correlation coefficient between the two stocks. Does it appear that a portfolio consisting of XYZ and ABC would provide good diversification? Calculate the annual returns that would have been achieved had you owned a portfolio consisting of 50% in XYZ and 50% in ABC over the past five years. Calculate the average return and standard deviation of returns for the portfolio. How does the portfolio compare with the individual stocks? Would you prefer the portfolio to owning either of the stocks alone? XYZ Returns ABC Returns Create a chart that shows how the standard deviation of the portfolio's returns changes as the weight of XYZ changes.
Transcribed Image Text:7. You are considering an investment in the stock market and have identified two potential stocks (XYZ and ABC) to purchase. The historical returns for the past five years are shown in the table below. i. ii. iii. iv. V. Year 2000 11% 25% 2001 15% 12% 2002 21% 19% 2003 9% 13% 2004 13% 8% Calculate the average return and standard deviation of returns for each stock over the past five years. Based on this information alone, which stock would you prefer to own? Would everybody make the same choice? Calculate the correlation coefficient between the two stocks. Does it appear that a portfolio consisting of XYZ and ABC would provide good diversification? Calculate the annual returns that would have been achieved had you owned a portfolio consisting of 50% in XYZ and 50% in ABC over the past five years. Calculate the average return and standard deviation of returns for the portfolio. How does the portfolio compare with the individual stocks? Would you prefer the portfolio to owning either of the stocks alone? XYZ Returns ABC Returns Create a chart that shows how the standard deviation of the portfolio's returns changes as the weight of XYZ changes.
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