Question

1. Consider that 2 investment funds exist. ABC Fund(invested in 50% normal stock and 50% risky bonds) and 123 Fund(invested in 25% High risk stock and 75% normal bonds). Assume you have the following historical data of annual returns:                        

	Return	S.D.
Normal Stock	8%	20%
Risky Bonds	10%	35%
High Risk Stock	14%	40%
Normal Bonds	6%	10%

If Normal Stock and Risky Bonds have a correlation coefficient of 0.4 and High-Risk Stock and Normal Bonds have a correlation coefficient of 0 .2. Find the expected return and standard deviation of each Fund.

2. Go to http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

Download 5 Industry Portfolios. Import this data into excel.

1. Put the return in annualized decimal form. (multiply each observation by 12/100, do this first) Calculate the mean, variance and standard deviation for each of the five Industries returns.
2. Construct covariance and correlation coefficient tables between all five portfolios. Turn in your end results only with homework(not all your excel sheets), save your work, you will come back to this.

Answer 1

1)

formulas used:

w1 = weight of stock 1 in fund

w2 = weight of stock 2 in fund

corr = correlation between the stocks in the fund

r1 = expected return of stock 1 in fund

r2 = expected return of stock 2 in fund

expected return = (w1*r1)+(w2*r2)

variance = (w1*s1)² + (w2*s2)² + (2*w1*w2*corr*s1*s2)

standard deviation = (variance )^(1/2)