standard deviation, variance, and correlation are included as built-in functions
ID: 2676495 • Letter: S
Question
standard deviation, variance, and correlation are included asbuilt-in functions. Below is recent monthly stock return data for
ExxonMobil (XOM) and Microsoft (MSFT). Using a spreadsheet
and its functions, compute the average, variance, standard deviation,
and correlation between the returns for these stocks. What
does the correlation between the returns imply for a portfolio
containing both stocks?
MONTH XOM RETURN MSFT RETURN
November 4.6% 10.4%
October 0.1% 13.6%
September 1.9% 10.3%
August 3.3% 13.8%
July 4.4% 9.3%
June 1.6% 5.5%
May 0.7% 2.1%
April 9.4% 23.9%
March 0.1% 7.3%
February 3.2% 3.4%
Explanation / Answer
Average are 2.93% and 9.96% Variance are: 7.87%% & 39.42%% Standard deviation are: 2.81% & 6.28% Correlation = 0.6934 Correlation coefficient = 0.6934 which is positive and higher than 0.5 (Positively correlated stock prices move in the same directions, and have a correlation coefficient that greater than zero. The correlation coefficient’s numerical value shows the strength of the correlation between the two stock prices. The stronger the positive correlation, the closer the value of the correlation coefficient will be to +1.) Hence, a portfolio containing both stocks as high risk.
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