I need help to solve some problems from book Investment Analysis and Portfolio Management (9th ed.). FINANCE major. Book from: Frank K. Reilly, & Keith C. Brown, (2009). Mason, OH: South-Western/ Cengage Learning. Book used by Strayer University.
Please see the attachment:
This solution includes detailed explanation and step-by-step calculation of expected rate of return, standard deviation, covariance and correlation coefficient between the rates of return. An explanation of an expectation of the level of correlation is also included along with a graph to illustrate how the correlation between two stocks are related.
Covariance and correlation between the returns on stocks
9.8 Using the returns for the period 1981 to 1985 listed below, calculate the five-year holding period return on the S&P 500 index.
1981 1982 1983 1984 1985
S&P 500 index return(%) -4.97 21.67 22.57 6.19 31.85
10.2. Suppose you have invested only in two stocks, A and B. The returns on the two stocks depend on the following three states of the economy, which are equally likely to happen.
State of Return on Return on
Economy Stock A (%) Stock B (%)
Bear 6.30 -3.70
Normal 10.50 6.40
Bull 15.60 25.30
a. Calculate the expected return on each stock.
b. Calculate the standard deviation of returns on each stock
Calculate the covariance and correlation between the returns on the two stocks.