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Homework answers / question archive / You are considering two securities, Stock A and Stock B, and the relevant information are given as below: Year 2013 2014 2015 2016 2017 2018 2019 Stock A Closing Price (RM) 0

You are considering two securities, Stock A and Stock B, and the relevant information are given as below: Year 2013 2014 2015 2016 2017 2018 2019 Stock A Closing Price (RM) 0

Finance

You are considering two securities, Stock A and Stock B, and the relevant information are given as below: Year 2013 2014 2015 2016 2017 2018 2019 Stock A Closing Price (RM) 0.51 0.12 0.28 0.37 0.87 0.94 1.42 Stock B Closing Price (RM) 1.67 1.38 1.70 1.85 2.00 1.99 2.18 (a) Calculate the average annual return for each stock. (8 marks) (b) Calculate the standard deviation for each stock. (7 marks) (c) You plan to buy 100,000 shares from both companies. The current market price for Stock A and Stock B are RM0.12 and RM1.38 respectively. Assume the correlation between the stocks is 0.46. i. Calculate the weightage for your portfolio. (2 marks) ii. Calculate the expected return of your portfolio. (3 marks) iii. Calculate the standard deviation of your portfolio. 

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a. Annual return can be calculated using below formula,

Annual return = (price at end of year- price at beginning of year)/price at beginning of year

We can't compute annual return for 2013 as it's previous year data not available.

Annual returns :

Year stock A closing price annual return StockStock B closing price Annual return
2013.   0.51 - 1.67 -
2014

0.12

(0.12-0.51)/0.51=

-0.7647

 1.38 (1.38-1.67)/1.67=-0.1736
2015 0.28 (0.28-0.12)/0.12=1.33 1.70

(1.70-1.38)/1.38=0.2319
2016 0.37 (0.37-0.28)/0.28=0.3214 1.85

(1.85-1.70)/1.70=0.0882
2017 0.87 (0.87-0.37)/0.37=1.3514 2.00 (2-1.85)/1.85=0.0811
2018 0.94 (0.94-0.87)/0.87=0.0805 1.99 (1.99-2)/2=-0.005
2019 1.42 (1.42-0.94)/0.94=0.5106 2.18 (2.18-1.99)/1.99=0.0955

We have annual return values of two companies for 6 years

Average annual return of stock A is,

= (-0.7647+1.33+0.3214+1.3514+0.0805+0.5106)/6

= 0.472

Average annual return of stock B is,

= (-0.1736+0.2319+0.0882+0.0811-0.005+0.0955)/6

= 0.053

b. Standard deviation:

Standard deviation is square root of sum of all squares of deviations from it mean or average return

Caluculating square of deviations:

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