Bridge program, Summer 2005

Finance module, Assignment 4

Assignment 4: Portfolios and Statistics

1. Consider the one-month returns provided in the le assign4.xls on three dierent assets: the S&P 500 portfolio, 30-year bonds, and 90-day T-bills. Calculate the average monthly returns and standard deviations for these portfolios. Can you convert them into annual terms? Hint: see section 15.5 on annualizing standard deviations. 2. Consider the three stocks in the le assign4.xls (KO, EK, IBM). (a) Estimate the means and standard deviations of the returns of each of the three stocks. (b) Estimate the correlations between the returns of any two of these stocks (you need to calculate three of these). Hint: if you use Excel formulas (such as =AVERAGE() and =STDEV()) you may save yourself some work. 3. Given that the estimates from the previous question are good guidance for the next year, estimate the expected return and standard deviation of the following three portfolios: Portfolio A invests 20% in KO and 80% in IBM. Portfolio B invests 50% in IBM and 50% in EK. Portfolio C invests 120% in KO and -20% in EK (i.e. the portfolio shorts 20% of EK and invest all the money plus the proceeds from the short-sale in KO).

Tuck School of Business at Dartmouth

Pr. Diego Garc a