You are given the following information concerning a stock and the market: Retur

Question

You are given the following information concerning a stock and the market:

Returns

Year            Market          Stock
2005            16 %             28 %
2006            15                31
2007            16                 7
2008           -14               -25
2009            37                16
2010            15                 26

1.Calculate the average return and standard deviation for the market and the stock. (Use excel to complete the problem. Round your answer to 2 decimal place. Omit the "%" sign in your response.)

                                Market             Stock
Average return                    %                    %
Standard deviation               %                    %

2.Calculate the correlation between the stock and the market, as well as the stock’s beta. (Use excel to complete the problem. Round your correlation answer to 4 decimal places and Beta answer to 4 decimal places.)


Correlation:
Beta:

Explanation / Answer

Market

Average return = (1/6)(16+15+16-14+37+15) = 14.167%
SD = (1/6)[(16-14.167)2+(15-14.167)2+....+(15-14.167)2]=14.848%

Stock

Average return = (1/6)(28+31+7-25+16+26) = 13.833%
SD = (1/6)[(28-13.833)2+(31-13.833)2+....+(26-13.833)2]=19.161%

Covariance = (1/6)[(16-14.167)(28-13.833)+(15-14.167)(31-13.833)+...+(15-14.167)(26-13.833)]

Covariance = 196.861

Correlation = Covariance/(SDmarketxSDstock)=198.861/(14.848x19.161) = 0.692

Beta = Covariance/SDmarket2 = 198.861/14.8482=0.893

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