Year Price ($) Return
Question 1
1989 1.2 a. Estimate the average annual return you would have made on your investment.
1990 2.09 74.17% b. Estimate the standard deviation and variance in annual returns.
c. If you were investing in Microsoft today, would you expect the historical standa
1991 4.64 122.01% deviations and variances to continue to hold? Why or why not?
1992 5.34 15.09%
1993 5.05 -5.43%
1994 7.64 51.29% I will not expect the historical standard d
1995 10.97 43.59% Average annual return 62.23% market conditions, industry competition
1989, factors like technological advance
1996 20.66 88.33% Standard deviation 42.49% impact future volatility. Furthermore, M
1997 32.31 56.39% Variance 0.180536 business model, new product lines, acqu
1998 69.34 114.61%
Year SA ATT SA ATT Question 2
a. Estimate the average
1989 80.95% 58.26% Average annual return 27.37% 17.80% each company.
1990 -47.37% -33.79% Standard deviation 51.36% 27.89% b. Estimate the covarian
1991 31% 29.88% companies
1992 132.44% 30.35% Covariance 0.077448
1993 32.02% 2.94% Correlation 0.540695
1994 25.37% -4.29%
1995 -28.57% 28.86%
1996 0.00% -6.36%
1997 11.67% 48.64%
1998 36.19% 23.55%
gold stock Question 3
average return 8% 20% a. If you were constrained to pick just one, which one would you
Based on average return and standard deviation rate, I would choo
standard deviation 25% 22% return (20%) and lower standard deviation (22%) which indicates lo
correlation -0.4 b. A friend argues that this is wrong. He says that you are ignorin
on gold. How would you go about alleviating his concern?
To alleviate the concern about missing out on the "big payoffs" fro
- Create a portfolio combining both gold and stock. Because the co
negative (-0.4), diversification would reduce the overall portfolio ri
in the potential gains from gold.
- Highlight the risk-reward tradeoff: Gold may provide significant re
comes with higher risk.
c. How would a portfolio composed of equal proportions in gold a
return and standard deviation, compared to those of individual a
Average return of portfolio: Rp=0.5×Rgold+0.5×Rstock
Rp=0.5×8%+0.5×20%=14%
σ portfolio = Sqrt((0.5^2*σgold^2)+(0.5^2*σstock^2)+(2*0.5*0.5*
= Sqrt of((0.5^2*0.25^2 )+(0.5^2*0.22^2 )+(2*0.5*0.5*
= 0.1293 = 12.93%
The portfolio composed of equal proportions of Gold and Stock pro
which is higher than Gold (8%) but lower than Stock (20%). The sta
is 12.93%, which is lower than the standard deviation of both indiv
22%). This means the portfolio can provide a higher return for each
investing in just one asset.
investing in just one asset.
have made on your investment.
n annual returns.
you expect the historical standard
y or why not?
t expect the historical standard deviations and variances would continue to hold. As the
conditions, industry competition, and economic environment have changed significantly since
ctors like technological advancements, economic cycles, and company-specific risks can
uture volatility. Furthermore, Microsoft's performance can also be affected by changes in its
s model, new product lines, acquisitions, and competition.
Question 2
a. Estimate the average and standard deviation in annual returns in
each company.
b. Estimate the covariance and correlation in returns between the two
companies
just one, which one would you choose?
dard deviation rate, I would choose stock because it has a higher
eviation (22%) which indicates lower risk.
ng. He says that you are ignoring the big payoffs that you can get
alleviating his concern?
sing out on the "big payoffs" from gold:
h gold and stock. Because the correlation between the two assets is
ld reduce the overall portfolio risk while still allowing participation
: Gold may provide significant returns in some scenarios, but it also
ed of equal proportions in gold and stocks do in terms of avearge
mpared to those of individual assets?
5×Rgold+0.5×Rstock
5×8%+0.5×20%=14%
+(0.5^2*σstock^2)+(2*0.5*0.5*σgold*σstock*correlation))
2 )+(0.5^2*0.22^2 )+(2*0.5*0.5*(-0.4)*0.25*0.22)
roportions of Gold and Stock provides an average return of 14%,
lower than Stock (20%). The standard deviation of the portfolio
standard deviation of both individual assets (Gold: 25%, Stock:
provide a higher return for each unit of risk taken, compared to
