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Week 3 Chapter 7

The document requests help with solving problems 1 and 3 from chapter 7 of the book "Investment Analysis and Portfolio Management". Problem 1 asks to compute the expected rate of return for Lauren Labs common stock given probabilities of possible returns ranging from -20% to 40%. Problem 3 provides the monthly rates of return for two companies, Madison Cookies and Sophie Electric, over 6 months and asks to calculate various metrics and analyze the level of correlation between the stocks.

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45 views2 pages

Week 3 Chapter 7

The document requests help with solving problems 1 and 3 from chapter 7 of the book "Investment Analysis and Portfolio Management". Problem 1 asks to compute the expected rate of return for Lauren Labs common stock given probabilities of possible returns ranging from -20% to 40%. Problem 3 provides the monthly rates of return for two companies, Madison Cookies and Sophie Electric, over 6 months and asks to calculate various metrics and analyze the level of correlation between the stocks.

Uploaded by

Lina Jap
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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I need help to solve some problems from book Investment Analysis and Portfolio

Management (9th ed.). FINANCE major. Book from: Frank K. Reilly, & Keith C. Brown,
(2009). Mason, OH: South-Western/ Cengage Learning. Book used by Strayer University.

Please see the attachment:

Chapter 7, problems, #1, and #3 pages 201-202

1. Considering the world economic outlook for the coming year and estimates of sales
and earnings for the pharmaceutical industry, you expect the rate of return for Lauren
Labs common stock to range between 20 percent and +40 percent with the following
probabilities:
Compute the expected rate of return E(R i) for Lauren Labs.

Probability Possible Returns

0.10 0.20

0.15 0.05

0.20 0.10

0.25 0.15

0.20 0.20

0.10 0.40

3. The following are the monthly rates of return for Madison Cookies and for Sophie
Electric during a six-month period.

Month Madison Cookies Sophie Electric

1 0.04 0.07

2 0.06 0.02

3 0.07 0.10

4 0.12 0.15

5 0.02 0.06

6 0.05 0.02
Compute the following:

a. Average monthly rate of return [E(Ri)] for each stock


b. Standard deviation of returns for each stock
c. Covariance between the rates of return
d. The correlation coefficient between the rates of return

What level of correlation did you expect? How did your expectations compare with the
computed correlation? Would these two stocks offer a good chance for diversification?
Why or why not?

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