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Msf 534 Supplemental

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Review Session 4 Problems:

1) Stock M and Stock N have had returns for the past three years of –12%. 10%, 32% and 6%, 15%, 24% respectively. Calculate the covariance between the two securities.

2) Stock P and stock Q have had annual returns of -10%, 12%, 28% and 8%, 13%, 24% respectively. Calculate the covariance of return between the securities.

3) Stock X has a standard deviation of return of 10%. Stock Y has a standard deviation of return of 20%. The correlation coefficient between stocks is 0.5. If you invest 60% of the funds in stock X and 40% in stock Y, what is the standard deviation of a portfolio?

4) If the covariance between stock A and stock B is 100, the standard deviation of stock A is 10% and that of stock B is 20%, calculate the correlation coefficient between the two securities.

5) Use the data supplied below for the following questions (note: you should be able to click on the data to activate the spreadsheet. You can then copy and paste it into your own spreadsheet):

a) Use the data to calculate annual rates of return for Bartman, Reynolds, and the Winslow 5000 Index, and then calculate each entity's average return over the five-year period. (Hint: Remember, returns are calculated by subtracting the beginning price from the ending price to get the capital gain or loss, adding the dividend to the capital gain or loss, and dividing the result by the beginning price. Assume that dividends are already included in the index. Also, you cannot calculate the rate of return for 2000 because you do not have 1999 data.)

b) Calculate the standard deviations of the returns for Bartman, Reynolds, and the Wiinslow 5000.

c) Now calculate the coefficients of variation for Bartman, Reynolds, and the Wiinslow 5000.

6) Use the data supplied below to answer the following questions (again, you should be able to

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