Question

Problem 7-12 Diversification Here are the percentage returns on two stocks. Digital Cheese Executive Fruit n Month January February March April May June July August ya yang a-1. Calculate the monthly variance and standard deviation of each stock. (Do not round intermediate calculations. Round your answers to 1 decimal places.) Digital Cheese Executive Fruit Variance Standard deviation % a-2. Which stock is the riskier if held on its own? Digital Cheese Executive Fruit b. Now calculate the variance and standard deviation of the returns on a portfolio that invests an equal amount each month in the two stocks. (Do not round intermediate calculations. Round your answers to 1 decimal places.) Variance Standard deviation %

Answer 1

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© v 08-27 ENG 25-03-2020 23 QH92 QD QE QE QG QHQ QI QK QLQM (A DIGITAL CHEESE = X EXECUTIVE FRUIT = Y RETURNS MONTH JAN FEB MARCH APRIL MAY JUNE JULY AUG do NAW XBAR = 1.875 (X-XBAR)^2 147.015625 23.765625 17.015625 37.515625 34.515625 4.515625 15.015625 97.515625 376.8750 (X-XBAR)^2 YBAR = 3.375 (Y-YBAR)^2 6.890625 5.640625 0.390625 112.890625 1.890625 6.890625 54.390625 28.890625 217.8750 (Y-YBAR)^2 104 105 106 TOTAL RETURN EXPECTED RETURN 107 15 1.875 (15/8] E(X-XBAR)^2/n (376.875/8] 47.1 27 3.375 [27/8] (Y-YBAR)^2/n (217.875/8] 27.2 109 a 1 n = NO OF OBSERVATIONS VARIANCE VARIANCE VARIANCE 6.9 5.2 113 114 115 STANDARD DEVIATION SQRT(VARIANCE) ... MEAN STDV assignment DEAR prob sd cov TIME SERIES corr REGRESSION range CAMERA INTERVAL, NORMAL TREND freq MATRIX HYPO ... : [

© v 08-28 ENG 25-03-2020 23 fix X QF QG QH QI a QK QL QM QN o QM137 QE 116 117 118 119 a 2 DIGITAL CHEESE MORE RISKIER AS IT HAS HIGHER STANDARD DEVIATION 120 PORTFOLIO RETURN Rp =0.5(X) + 0.5(Y) RPBAR = 2.625 (Rp - RpBAR)^2 RETURNS MONTH JAN FEB MARCH APRIL MAY JUNE JULY AUG 54.390625 13.140625 5.640625 70.140625 13.140625 5.640625 31.640625 58.140625 251.8750 (Rp - RpBAR)^2 131 132 133 10.00 -1.00 5.00 11.00 -1.00 5.00 -3.00 -5.00 TOTAL RETURN = 21.00 EXPECTED RETURN = 2.625 [20/8] [251.8750/8] 5.6 (SQRT(VARIANCE) [SQRT(31.5)] 134 135 b 136 137 VARIANCE = (Rp-RpBAR)^2/ n= 31.5 STANDARD DEVIATION = SQRT (Z(RP-RPBAR)^2/n) = 138 C so answer : LESS THAN HALFWAY 139 ... MEAN STDV assignment DEAR prob sd cov TIME SERIES corr REGRESSION range CAMERA INTERVAL, NORMAL TREND freq MATRIX HYPO...