CHAPTER 7 PROBLEM:

Problem 3:  The following are the monthly rates of return for Madison Cookies and for Sophie Electric during a six month period.

MONTH                                             MADISON COOKIES                                              SOPHIE ELECTRIC

1                                                                        -0.04                                                                       0.07

2                                                                         0.06                                                                      -0.02

3                                                                        -0.07                                                                     -0.10

4                                                                         0.12                                                                      0.15

5                                                                        -0.02                                                                    -0.06  

6                                                                         0.05                                                                     0.02

Compute the following.

(a). Average monthly rate of return Ri for each stock.

(d). The correlation coefficient between the rates of return

What level of correlation dod you expect? How did your expectations compare with the computed correlation?  Would these two stocks be good choices for iversifcation?  Why or why not

QUETIONS 7   The followng are monthly percentage price changes for four market indexes.

MONTH                        DJIA                    S & P 500                     RUSSELL 2000                                   NIKKEI

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. Coveriance between the rates of return for the following indexes

DJIA-S&P 500

S&P 500-Russell 2000

S&P 500-Nikkei

Russell 2000-Nikkei

d. The correlation coefficients for the same four combintions. 

(e)  Using the answers from parts (a), (b) and (d), calculate the expected return and stadard deviation of a portfolio consisting of equal parts of (1) the S & P and Russell 2000 and (2) the S & P and Nikkei.  Discuss thw two portfolios.

Quetion 8.  The standard deviation of Shanrock Corp. stock is 19 percent.  The standard deviation of Cara Co. stock is 14 percent.  The covariance between these two stocks is 100.  What s the correlation between Shamrock and Cara stock?