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QUESTION 1 HAND CALCUALTION OR SPREADSHEET ANALYSIS. For this and the next 3 questions. Please use...

QUESTION 1

  1. HAND CALCUALTION OR SPREADSHEET ANALYSIS. For this and the next 3 questions. Please use the following data to answer the questions that follow. Calculate the covariance of Stock A and the Market. If you wish, copy over the data to Excel and use spreadsheet functions to perform the analysis. Be sure to correct for sample.

    Year

    Market

    Stock A

    Stock B

    1

    0.03

    0.16

    0.05

    2

    -0.05

    0.20

    0.05

    3

    0.01

    0.18

    0.05

    4

    -0.10

    0.25

    0.05

    5

    0.06

    0.14

    0.05

    -0.0154

    -0.00268

    0.00415

    0.00178

    0.00000

    None of the above

1 points   

QUESTION 2

  1. What is the covariance of Stock B and the Market.

    -0.0154

    -0.00268

    0.00415

    0.00178

    0.00000

    None of the above

1 points   

QUESTION 3

  1. What is the variance of Stock A?

    -0.0154

    -0.00268

    0.00415

    0.00178

    0.00000

    None of the above

1 points   

QUESTION 4

  1. Suppose you invest 45 percent of your funds in Stock B and the rest in Stock A. Calculate the standard deviation of a portfolio of the two stocks.

    0.02320

    0.04219

    0.00415

    0.00

    None of the above
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Homework Answers

Answer #1

Data In Excel

1. Covariance between stock A and the Market

We will use the COVARIANCE.S function in Excel as shown below

=COVARIANCE.S(B2:B6,C2:C6) = -0.00268

Answer -> -0.00268

2. Covariance of Stock B and Market:

We will use this function in Excel: =COVARIANCE.S(B2:B6,D2:D6) = 0

3. Variance of Stock A

We will use the VAR.S function in Excel as shown below:

=VAR.S(C2:C6) = 0.00178

4. Standard deviation of the portfolio

The standard deviation of A: =STDEV.S(C2:C6) = 0.04219

Standard Deviation of B = STDEV.S(D2:D6) = 0

Covariance between A and B: =COVARIANCE.S(C2:C6, D2:D6) = 0

Weight of stock A in the portfolio = WA = 0.55, Weight of stock B in the portfolio = WB = 0.45

Variance of the portfolio is calculated using the formula:

σ2P = WA2* σ2A + WB2* σ2B + 2*WA*WB*Cov(A,B)

σA = Standard deviation of A = 0.04219

σB = Standard deviation of B = 0

Cov(A,B) = Covariance between A and B = 0

σ2P = 0.552*0.042192 + 0.452* 0+ 2*0.55*0.45*0

σ2P = 0.552*0.042192 + 0 + 0

σP = 0.55*0.04219 = 0.0232045254207019

standard deviation of a portfolio of the two stocks = 0.02320

Answer

1. -0.00268

2. 0.00000

3. 0.00178

4. 0.02320

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