Reference no: EM132712108

Problem - You are considering an investment in the stock market and have identified two potential stocks (XYZ and ABC) to purchase. The historical returns for the past five years are shown in the table below.

Required -

a. Calculate the average return and standard deviation of returns for each stock over the past five years. Which stock would you prefer to own? Would everyone make the same choice?

b. Calculate the correlation coefficient between the two stocks. Does it appear that a portfolio consisting of XYZ and ABC would provide good diversification?

c. Calculate the annual returns that would have been achieved had you owned a portfolio consisting of 50% in XYZ and 50% in ABC over the past five years.

d. Calculate the average return and standard deviation of returns for the portfolio. How does the portfolio compare with the individual stocks? Would you prefer the portfolio to owning either of the stocks alone?

e. Create a chart that shows how the standard deviation of the portfolio's returns changes as the weight of XYZ changes.

f. Using the Solver, what is the minimum standard deviation that could be achieved by combining these stocks into a portfolio? What are the weights of the stocks that result in this minimum standard deviation?