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Average return, volatility, covariance, correlation

Using the data in the following table, estimate (a) the average return and volatility for each stock, (b) the covariance between the stocks, and (c) the correlation between these two stocks.

Realized Returns
Year Stock A Stock B
1998 -10% 21%
1999 20% 30%
2000 5% 7%
2001 -5% -3%
2002 2% -8%
2003 9% 25%

Solution Preview

The calculations are in the excel file attached:
Using the data in the following table, estimate (a) the average return and volatility for each stock, (b) the covariance between the stocks, and (c) the correlation between these two stocks.

Realized Returns
Year Stock A Stock B
1998 -10% 21%
1999 20% 30%
2000 5% 7%
2001 -5% -3%
2002 2% -8%
2003 9% 25%

Please Note: The % have been written in decimal form (0.21 for 21% and so on

Stock A Stock B
X Y X^2 Y^2 (X-Xmean) (Y-Ymean) (X-Xmean) x ...

Solution Summary

Average return and volatility of return of two stocks have been computed. Also, covariance and correlation between the two stock returns has been calculated.

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