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Investment Theory: Percentage Price Changes for Market Indexes

The following are monthly percentage price changes for four market indexes.

Month DJIA S&P 500 Russell 2000 Nikkel
1 0.03 0.02 0.04 0.04
2 0.07 0.06 0.10 -0.02
3 -0.02 -0.01 -0.04 0.07
4 0.01 0.03 0.03 0.02
5 0.05 0.04 0.11 0.02
6 -0.06 -0.04 -0.08 0.06

Compute the following.

A) Average monthly rate of return for each index
B) Standard deviation for each index
C) Covariance between the rates of return for the following indexes:
DJIA-S&P
S&P 500-Russel 2000
S&P 500-Nikkei
Russell 2000-Nikkei
D) The correlation coefficients for the same four combinations
E) Using the answers from parts (a), (b), and (d), calculate the expected return and standard deviation of a portfolio consisting of equal parts of (1) the S&P and the Russell 2000 and (2) the S&P and the Nikkei. Discuss the two portfolios.

Solution Summary

The solution discusses the investment theory regarding the percentage price changes for four market indexes.

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