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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) 0.51 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.
Expert Solution
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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