Question

7. Using historical data to measure portfolio risk and correlation coefficient Pam is an investor who believes that past variability of stocks is a reasonably good estimate of future risk associated with the stocks. Pam works on creating a new portfolio and has already purchased stock A. Now she considers two other stocks, B and C. Pam collected data on the historic rates of return for all three stocks, which are presented in the following table. Complete the table by calculating standard deviations for each stock: Year Stock A Stock B Stock C 2013 40% -5% 35% 2014 -10% 40% -5% 2015 35% -10% -10% 2016 -5% 35% 40% Average return % % % Standard deviation Suppose Pam can only afford to complement stock A by adding just one of the two other stocks, either stock B or stock C. Complete the following table by computing correlation coefficients between stocks A and B and between stocks A and C, and calculate average returns and standard deviation for the two potential portfolios, AB and AC: Stocks A and B Stocks A and C Correlation coefficient Average return % % Standard deviation

          7. Using historical data to measure portfolio risk and correlation coefficient
Pam is an investor who believes that past variability of stocks is a reasonably good estimate of future risk associated with the stocks. Pam works on creating a new portfolio and has already purchased stock A. Now she considers two other stocks, B and C. Pam collected data on the historic rates of return for all three stocks, which are presented in the following table. Complete the table by calculating standard deviations for each stock:
Year
Stock A
Stock B
Stock C
2013
40%
-5%
35%
2014
-10%
40%
-5%
2015
35%
-10%
-10%
2016
-5%
35%
40%
Average return
%
%
%
Standard deviation
Suppose Pam can only afford to complement stock A by adding just one of the two other stocks, either stock B or stock C. Complete the following table by computing correlation coefficients between stocks A and B and between stocks A and C, and calculate average returns and standard deviation for the two potential portfolios, AB and AC:
Stocks A and B
Stocks A and C
Correlation coefficient
Average return
%
%
Standard deviation

7. Using historical data to measure portfolio risk and correlation coefficient
Pam is an investor who believes that past variability of stocks is a reasonably good estimate of future risk associated with the stocks. Pam works on creating a new portfolio and has already purchased stock A. Now she considers two other stocks, B and C. Pam collected data on the historic rates of return for all three stocks, which are presented in the following table. Complete the table by calculating standard deviations for each stock:
Year
Stock A
Stock B
Stock C
2013
40%
-5%
35%
2014
-10%
40%
-5%
2015
35%
-10%
-10%
2016
-5%
35%
40%
Average return
%
%
%
Standard deviation
Suppose Pam can only afford to complement stock A by adding just one of the two other stocks, either stock B or stock C. Complete the following table by computing correlation coefficients between stocks A and B and between stocks A and C, and calculate average returns and standard deviation for the two potential portfolios, AB and AC:
Stocks A and B
Stocks A and C
Correlation coefficient
Average return
%
%
Standard deviation

Added by Christopher J.

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