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9.8 and 10.2 : Calculate the covariance and correlation between the returns on the two stocks.

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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.

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Solution Preview

Please see the attached file.

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

To calculate the holding period return we need to take the geometric mean (GM)
GM = ...

Solution Summary

The expert examines the returns on covariance and correlation between the return on stocks.

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