ICE 7 1.

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. Year XYZ Returns ABC Returns 2005 11% 25% 2006 15% 12% 2007 21% 19% 2008 9% 13% 2009 13% 8% 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? Graph XYZ and ABC returns. 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 portfolios returns changes as the weight of XYZ changes.