Using the data in the following table, estimate the: a....

Using the data in the following table, estimate the: a. Average return and volatility for each stock. b. Covariance between the stocks. c. Correlation between these two stocks. a. Estimate the average return and volatility for each stock. The average return of stock A is 1.17 %. (Round to two decimal places.) The average return of stock B is 12.17 %. (Round to two decimal places.) The standard deviation of stock A is 0.17877. (Round to five decimal places.) Data Table (Click on the following icon in order to copy its contents into a spreadsheet.) Year 2010 2011 2012 2013 2014 2015 Stock A - 8% 5% 7% - 4% 2% 5% Stock B 21% 35% 4% - 8% - 11% 32%

Transcript

0:00 All right.

00:01 So here you're asked to use the data in the shown table to estimate in part a, the average return and the volatility for each stock.

00:09 So right off the bat here, i'm going to note the answers that you have, they are correct.

00:16 I'm hoping at least that that is what, essentially, i'm hoping at least that that is what you're expecting.

00:25 But i can't tell with the way that it's colored.

00:28 I'm not entirely sure whether that's supposed to be.

00:30 To indicate you have those correct or incorrect.

00:33 That being said, the average rate of return for a and b, those are correct.

00:39 Then do this using excel, or if you wanted to, you can calculate this by hand.

00:47 We'd have that the standard deviation of a is 0 .17877.

00:55 Or, pardon me, i just read off the answer you already had up there.

00:59 It's 5 .91326.

01:01 Or if we round it to five decimal places here one two three four five yeah okay that is already round the five decimal places and i'm going to assume that they're going to expect the standard deviation for b as well now i am going to note here that with the numbers that i'm showing here that is treating this as a population or as a sample standard deviation rather than a population standard deviation so if i'd say in this context, actually, i'm just going to make a slight adjustment to fix that then because really should be population standard deviation.

01:49 So we have six data points.

01:52 So we'd be applying way square root of five over square root of six.

02:01 All right.

02:01 So it should be about 5 .39804 and 18 .2703 for b.

02:08 And if, hopefully you have multiple chances for this, but if it doesn't like these answers or these results, then try what i showed previously.

02:19 That's the difference between population versus sample standard deviations.

02:24 Then we're asked for the covariance between the stocks.

02:27 Now we have that the covariance is the sum of each individual x element minus its average value, times each individual y element minus there.

02:39 Average y value divided by n minus 1...

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