Returns on the stock of First Boston and Midas Metals for the years 2010-2013 are shown below. First Boston Midas Metals Portfolio 2010 -18.00% 26.00% 2011 32.00% -5.00% 2012 18.00% 3.00% 2013 1.00% 10.00%
a. Compute the average annual return for each stock and a portfolio consisting of 50% First Boston and 50% Midas.
b. Compute the standard deviation for each stock and the portfolio.
c. Are the stocks positively or negatively correlated and what is the effect on risk?
What will be an ideal response?
Answer:
First Boston Midas Metals Portfolio
2010 -18.00% 26.00% 4.00%
2011 32.00% -5.00% 13.50%
2012 18.00% 3.00% 10.50%
2013 1.00% 10.00% 5.50%
a. Avg. 8.25% 8.50% 8.38%
b. St.
Dev. 21.61% 13.18% 4.40%
c. The two stocks are negatively correlated. The return on the 50/50 portfolio is half way between the returns for each stock, but the standard deviation is much lower than for either stock, indicating that the portfolio has much less risk than the individual stocks.
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