Assume that you have created an investment portfolio consisting two assets at th

Question

Assume that you have created an investment portfolio consisting two assets at the beginning of 2011 and haven't changed your position during past years until today (assume that today is December 31,2015). We have two following sets of information; one set is historical and other set forecast information for 2016. Historical Market Information Set: 2016 Forecast Information Set: Based on historical information set, find: Stock A's arithmetic average return, geometric average return and holding period return. Stock B's standard deviation Portfolio's standard deviation. Stock B's Beta Based on forecast information set; If you believe CAPM is a right pricing model find: Stock B's Beta

Explanation / Answer

c)

Working:

Step-1: Standard deviation of Stock A and Stock B

Stock A:

Stock B:

Weights,

Covariance:

d)

e)

Working:

(a) Arithmatic average (%) = (8+10+5+8+11)/5 = 8.40% Geomatric average Step-1: = (1+.08)*(1+.1)*(1+.05)*(1+.08)*(1+.11) = 1.495 Step-2: = 5th root of Step-1 = 1.084 Step-3: = (Step-2) -1 = 1.084 -1 = 0.084 = 8.40% Holding period return Step-1: = (1+.08)*(1+.1)*(1+.05)*(1+.08)*(1+.11) = 1.495383 Step-2: = (Step-1)-1 = 0.495383 = 50%

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