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    Class 5: Stock Expected Return % Standard Deviation % Correlation

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    SwaggyVBros M
    Beta measures the volatility of an individual stock relative to the overall market, while variance measures the average deviation of that stock's returns from its expected value. The correlation coefficient between two stocks that gives the maximum risk reduction for a two-stock portfolio is +1. Based on the given historical return data, the beta for stock A is calculated to be 1.2. For stock B, with a correlation of 0.8 to the market and standard deviations of 35% and 20% respectively, the beta is calculated to be 1.75.

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    Class 5: Stock Expected Return % Standard Deviation % Correlation

    Uploaded by

    SwaggyVBros M
    42 views1 page
    Beta measures the volatility of an individual stock relative to the overall market, while variance measures the average deviation of that stock's returns from its expected value. The correlation coefficient between two stocks that gives the maximum risk reduction for a two-stock portfolio is +1. Based on the given historical return data, the beta for stock A is calculated to be 1.2. For stock B, with a correlation of 0.8 to the market and standard deviations of 35% and 20% respectively, the beta is calculated to be 1.75.

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    Beta measures the volatility of an individual stock relative to the overall market, while variance measures the average deviation of that stock's returns from its expected value. The correlation coefficient between two stocks that gives the maximum risk reduction for a two-stock portfolio is +1. Based on the given historical return data, the beta for stock A is calculated to be 1.2. For stock B, with a correlation of 0.8 to the market and standard deviations of 35% and 20% respectively, the beta is calculated to be 1.75.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    42 views1 page

    Class 5: Stock Expected Return % Standard Deviation % Correlation

    Uploaded by

    SwaggyVBros M
    Beta measures the volatility of an individual stock relative to the overall market, while variance measures the average deviation of that stock's returns from its expected value. The correlation coefficient between two stocks that gives the maximum risk reduction for a two-stock portfolio is +1. Based on the given historical return data, the beta for stock A is calculated to be 1.2. For stock B, with a correlation of 0.8 to the market and standard deviations of 35% and 20% respectively, the beta is calculated to be 1.75.

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    Class 5

    1. Answer the following questions:


    a. Briefly explain the difference between beta as a measure of risk and variance as a
    measure of risk.
    b. What is the correlation coefficient between two stocks that gives the maximum
    reduction in risk for a two-stock portfolio (assuming that the portfolio contains
    long positions in both stocks)?
    c. Historical nominal annual returns for stock A are –8%, +10% and +22%. The
    nominal returns for the market portfolio in the same years are +6%, +18% and
    24%. Calculate the beta for stock A.
    d. The correlation coefficient between stock B and the market portfolio is 0.8. The
    standard deviation of the stock B is 35% and that of the market is 20%. Calculate
    the beta of the stock.

    2. You can form a portfolio of two assets, A and B, whose returns have the following
    characteristics:

    Stock Expected Return % Standard Deviation % Correlation


    A 10 20 0.5
    B 15 40

    If you demand an expected return of 12%, what are the portfolio weights? What is the
    portfolio’s standard deviation?

    3. Here are some historical data on the risk characteristics of Dell and Home Depot:

    Dell Home Depot


    Yearly standard deviation of return (%) 29.32 29.27

    Assume that the standard deviation of the market return is 15 percent.


    a. The correlation coefficient between Dell and Home Depot’s return is 0.59. What
    is the standard deviation of a portfolio invested half in Dell and half in Home
    Depot?
    b. What is the standard deviation of a portfolio invested one-third in Dell, one-third
    in Home Depot and one-third in Treasury bills? [NOTE: assume that Treasury
    bills are completely risk-less.]
    c. What is the standard deviation of a portfolio that is split evenly between Dell and
    Home Depot and is financed at 50 percent margin, i.e., the investor puts up only
    50 percent of the total amount and borrows the balance from his broker?

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