Using the data in the following table, estimate (a) the average return and volat
ID: 2713456 • Letter: U
Question
Using the data in the following table, estimate (a) the average return and volatility for each stock (b) the covariance between the stocks and © the correlation between these two stocks Year 2007 2008 2009 2010 2011 2012 Stock A -10% 20% 5% -5% 2% 9% Stock B 21% 7% 30% -3% -8% 25% Using the data in the following table, estimate (a) the average return and volatility for each stock (b) the covariance between the stocks and © the correlation between these two stocks Year 2007 2008 2009 2010 2011 2012 Stock A -10% 20% 5% -5% 2% 9% Stock B 21% 7% 30% -3% -8% 25%Explanation / Answer
Solution: Realized Returns Year Stock A Stock B 2007 -10% 21% 2008 20% 7% 2009 5% 30% 2010 -5% -3% 2011 2% -8% 2012 9% 25% Realized Returns Covariance Calculation Year Stock A Stock B XA-XA bar XB - XB bar (XA-XA bar)*(XB-XB bar) 2007 -10.00% 21.00% -0.256460858 0.21 -0.05385678 2008 20.00% 7.00% 0.043539142 0.07 0.00304774 2009 5.00% 30.00% -0.106460858 0.3 -0.031938257 2010 -5.00% -3.00% -0.206460858 -0.03 0.006193826 2011 2.00% -8.00% -0.136460858 -0.08 0.010916869 2012 9.00% 25.00% -0.066460858 0.25 -0.016615214 a. Average return = AVERAGE of Stock A and Stock B 3.50% 12.00% -0.082251818 Volatility of Stock A = STDEV(Stock A) Volatility of Stock B = STDEV(Stock B) STDEV = Standarad Deviation 10.60% 15.65% -0.016450364 b. Covariance the "long" way (0.0165) Covariance using the Excel function = COVAR(Stock A & Stok B) *COUNT(StockA)/(COUNT(StockA)-1) = 0.0010 Note: If you use the Excel function, you'll get the population statistic. To get the sample statistic, just multiply by n/(n-1), as this cell does. 0.0010 c. Correlation coefficient = (0.0165)/{10.60%*15.65%}= (0.995) (0.99) Correlation coefficient using the Excel function =CORREL(StockA & StockB) 0.06
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