1. Companies A and B's stock price histories are reflected in the table below.
2010 2011 2012 2013 2014
Stock A $77 $79 $74 $89 $82
Stock B $41 $40 $44 $40 $50
a. Calculate the Periodic Rates of Return (aka Holding Period Returns) for Stocks A & B.
b. Calculate the Arithmetic Average return for Stocks A & B.
c. Calculate the Standard Deviation of returns for Stocks A & B.
d. Calculate the Coefficient of Variation for Stocks A & B.
e. Is there a dominant asset in this pair of stocks? If so, describe the relationship. If not, describe which stock a rational, risk-averse investor would choose.
f. Suppose that, for particular reasons, you want to form a portfolio that consists of 60% Stock B and 40% Stock A.
i. Calculate the expected return for the portfolio.
ii. Calculate the correlation coefficient that related the two stocks.
iii. Calculate the standard deviation for the portfolio.
iv. Suppose that the beta for Stock A equals 1.16 and the beta for Stock B equals 1.31. Calculate the beta for the portfolio.
g. Assuming a riskless rate of 1% and a return on the market portfolio of 9%, calculate the required return for Stock A, Stock B, and the portfolio described in part (g) using the CAPM's SML. Based on the viewpoint of the CAPM and its assumed and calculated inputs, what can we say about the viability of Stock A, Stock B, and the portfolio as investments?