Stocks A and B have the following historical returns: Year Stock A’s Returns, rA Stock B’s Returns, rB XXXXXXXXXX%) (24%) XXXXXXXXXX XXXXXXXXXX) XXXXXXXXXX XXXXXXXXXX a. Calculate the average rate...

Stocks A and B have the following historical returns:
Year Stock A’s Returns, rA Stock B’s Returns, rB
2003 (18%) (24%)
2004 44 24
2005 (22) (4)
2006 22 8
2007 34 56
a. Calculate the average rate of return for each stock during the 5-year period.
Assume that someone held a portfolio consisting of 50% of Stock A and 50%
of Stock B. What would have been the realized rate of return on the portfolio
in each year? What would have been the average return on the portfolio during
this period?
b. Now calculate the standard deviation of returns for each stock and for the
portfolio. Use Equation 6-5.
c. Looking at the annual returns data on the two stocks, would you guess that
the correlation coefficient between returns on the two stocks is closer to 0.8 or
to 0.8?
d. If you added more stocks at random to the portfolio, which of the following
is the most accurate statement of what would happen to p?
(1) p would remain constant.
(2) p would decline to somewhere in the vicinity of 20%.
(3) p would decline to zero if enough stocks were included.