1. The following are annual rates of return for U.S. government T-bills and U.K. common stocks. Year U.S Government T-Bills U.K Government Common Stock 2003 0.063 0.150 2004 0.081 0.043 2005 0.071 0.374 2006 0.090 0.192 2007 0.085 0.106
a. Compute the arithmetic mean rate of return and standard deviation of rates of return for the two series.
b. Discuss these two alternative investments in terms of their arithmetic average rates of return and their risk.
Compute the geometric mean rate of return for each of these investments. Compare the arithmetic mean return and geometric mean return for each investment and discuss this difference between mean returns as related to the standard deviation of each series.
2. The following are monthly percentage price changes for four market indexes: Month DJIA S&P 500 Russell 2000 1 0.03 0.02 0.04 2 0.07 0.06 0.1 3 -0.02 -0.01 -0.4 4 0.01 0.03 0.03 5 0.05 0.04 0.11 6 -0.06 -0.04 -0.08 Compute the following:
a. Expected monthly rate of return for each series.
b. Standard deviation for each series.
c. Covariance between the rates of return for the following indexes: DJIA—S&P 500 S&P 500—Russell 2000
d. The correlation coefficients for the same two combinations in question c.