Question

Stocks A and B have the following historical returns:

Year	Stock A's returns	Stock B's returns
2003	−19.00%	−15.50%
2004	34.00%	23.80%
2005	16.00%	29.50%
2006	−0.50%	−6.60%
2007	28.00%	27.30%

(a) Calculate the average rate of return and standard deviation of returns (as percents) for each stock during the 5-year period. (Round your standard deviations to two decimal places.)

stock A average rate of return %

standard deviation %

stock B average rate of return %

standard deviation %

(b) Assume that someone held a portfolio consisting of 50% of stock A and 50% of stock B and that the average annual realized returns and past volatility of each stock are unbiased estimators of their expected returns and future volatility. What is the portfolio's expected return and the volatility of next year's returns (as percents)? The correlation between the returns of the two stock is 90.83%. (Round your answers to two decimal places.)

expected return %

volatility %

Answer 1

ALL CALCULATIONS WITH STATS FORMULAS, NO EXCEL FUNCTION IS USED.