Homework 2 Total: 66 Please show all steps you take to get your answers. 1. The table below presents the returns on stocks ABC and XYZ for a five-year period. Year ABC XYZ 1 0.16 0.12 2 0.42 0.62 3...

Homework 2
Total: 66
Please show all steps you take to get your answers.
1. The table below presents the returns on stocks ABC and XYZ for a five-year period.
    Year
    ABC
    XYZ
    1
    0.16
    0.12
    2
    0.42
    0.62

    3
    -0.02
    -0.23
    4
    -0.26
    -0.62
    5
    0.48
    0.52
a. Calculate the average return, and standard deviation of stock ABC and XYZ. Also calculate the correlation between the two stocks. What does the correlation tell you about the return movements of the two stocks? (12)
    Year
    ABC
    XYZ
    (ABC - Avg ABC)
    (XYZ - Avg XYZ)
    (ABC - Avg ABC)^2
    (XYZ - Avg XYZ)^2
    1
    0.16
    0.12
    0.004
    0.038
    0.00002
    0.00144
    2
    0.42
    0.62
    0.264
    0.538
    0.06970
    0.28944
    3
    -0.02
    -0.23
    -0.176
    -0.312
    0.03098
    0.09734
    4
    -0.26
    -0.62
    -0.416
    -0.702
    0.17306
    0.49280
    5
    0.48
    0.52
    0.324
    0.438
    0.10498
    0.19184
    Average Return (Mean)
    0.156
    0.082
    
    
    0.3787
    1.0729
    Variance
     
     
     
     
    0.0757
    0.2146
    Standard Deviation
     
     
     
     
    0.2752
    0.4632
    Covariance
    0.1262
     
     
     
     
     
    Correlation
    0.9900
     
     
     
     
     
    
b. Calculate the weight of each stock in the minimum variance portfolio, assume the expected return equals to average return for each stock. (6)
Weight of each stock in the Minimum Variance Portfolio        
Weight of Stock ABC     0.5    
Weight of Stock XYZ    0.5    
Minimum Portfolio Variance     Formula = w12σ12 + w22σ22 + 2w1w2Cov1,2    
    
    Stock ABC    Stock XYZ
Weights of MPV    0.7445        0.2555
We took the weights of two stocks ABC & XYZ as 0.50 and then used solver by lowering the Minimum Variance Portfolio and the outcome were 0.7445 weights for Stock ABC and 0.2555 with weight for Stock XYZ.
c. Find the mix of stocks ABC and XYZ that gives a portfolio on the efficient frontier AND demonstrate why this portfolio is on the efficient frontier by showing that there exists another portfolio of stocks ABC and XYZ that has the same level of risk (portfolio standard deviation) but inferior return. Hint: manipulate the weights you get from part b. (16)
    Mix of Stocks ABC and XYZ that gives a portfolio on the efficient frontier
    ABC
    XYZ
    Portfolio...