Familiar Stocks (See Exercise 60 regarding the data, and Exercise 61 for the Sharpe ratio.) (a) Find the Sharpe ratio of stock in these three companies. Which looks best from this investment point of...


Familiar Stocks (See Exercise 60 regarding the data, and Exercise 61 for the Sharpe ratio.)


(a) Find the Sharpe ratio of stock in these three companies. Which looks best from this investment point of view?


(b) Form a new column by subtracting from the return each month on Exxon. Next divide this column of differences by the SD for Exxon. What is the mean value for this column?


(c) Look at the returns for December 2005. Do the returns in this month match up to the performance suggested by the Sharpe ratio? Explain briefly what happens.


Exercise 61


Tech Stocks (See Exercise 59.) Some investors use the Sharpe ratio as a way of comparing the benefits of owning shares of stock in a company to the risks. The Sharpe ratio of a stock is defined as the ratio of the difference between the mean return on the stock and the mean return on government bonds (called the risk-free rate to the SD of the returns on the stock.


The mean return on government bonds is= 0.0033 per month (that is, about
 of 1% per month, or 4% annually).


(a) Find the Sharpe ratio of stock in these three companies. Which looks best from this investment point of view?


(b) Form a new column by subtracting
from the return each month on Dell. Then divide this column of differences by the SD for Dell. What’s the mean value for this column?


(c) How does the Sharpe ratio differ from the type of standardizing used to form -scores?


Exercise 59


Tech Stocks These data give the monthly returns on stocks in three technology companies: Dell, IBM, and Microsoft. For each month from January 1990 through the end of 2005 (192 months), the data give the return earned by owning a share of stock in each company. The return is the percentage change in the price, divided by 100.


(a) Describe and contrast histograms of the three companies. Be sure to use a common scale for the data axes of the histograms to make the comparison easier and more reliable.


(b) Find the mean, SD, and coefficient of variation for each set of returns. Are means and SDs useful summaries of variables such as these?


(c) What does comparison of the coefficients of variation tell you about these three stocks?


(d) Investors prefer stocks that grow steadily. In that case, what values are ideal for the mean and SD of the returns? For the coefficient of variation?


(e) It is common to find that stocks that have a high average return also tend to be more volatile, with larger swings in price. Is that true for these three stocks?

May 04, 2022
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