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Problem 6-03 The following are the monthly rates of return for Madison Cookies and for Sophie...

Problem 6-03

The following are the monthly rates of return for Madison Cookies and for Sophie Electric during a six-month period.

Month Madison Cookies Sophie Electric
1 -0.02 0.06
2 0.06 -0.02
3 -0.07 -0.10
4 0.09 0.18
5 -0.02 -0.06
6 0.05 0.02

Compute the following. Do not round intermediate calculations. Round your answers to four decimal places.

  1. Average monthly rate of return R̅i for each stock.

    Madison Cookies:

    Sophie Electric:

  2. Standard deviation of returns for each stock.

    Madison Cookies:

    Sophie Electric:

  3. Covariance between the rates of return.
  4. The correlation coefficient between the rates of return.

    Would these two stocks be good choices for diversification? Why or why not?

    Madison Cookies and Sophie Electric are (Select-good, bad) choices for diversification as these assets have (Select-high positive, high negative, low positive, low negative) correlation.

Solutions

Expert Solution

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

jeff jeffy answered 1 year ago
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