Risk and return practice questions

1.
Years A B
2018 10% 21%
2019 8% 13%
2020 12% -15%
2021 15% 10%
2022 -7% 8%

Calculate the return of A stock

Calculate the return of stock B
Calculate the risk of stock A
Calculate the risk of stock B
Calculate the correlation and covariance between stocks A and B
Calculate the return of a portfolio with equal weights
Calculate the risk of a portfolio with equal weights

2.The probabilities of A and B stocks are 45%,30%, and

25%.
Returns of stock A are 10%,15%, and -2%
Returns of the stock B are 12%,9%, and 2%
The Standard deviation of A is 2%
The Standard deviation of B is 4.2%
Calculate the correlation and covariance between the A stock and
the B stock
3. Calculate the stock returns and their arithmetic mean and geometric
mean
years Stock prices
2018 450
2019 465
2020 480
2021 510
2022 540
p 1−P
Formula Calculation of Returns= Po
o

4.
Probabilities A B
20% 15% 20%
45% 12% 12%
35% 8% -4%

Calculate the Returns of the stock A ( 0.112 )

Calculate the returns of stock B (0.08 )
Calculate the risk of stock A ( )
Calculate the risk of Stock B ( )
Calculate the correlation and covariance between A and B
Calculate the portfolio risk by considering equal weights

Solution:

Probabilities A B

20% 15% 20%

45% 12% 12%
35% 8% -4%

Expected Return = E(R) = ∑ (Pi)( Ri)

i=1

Stock A E( R )= 0.112
Stock B E ( R )= 0.08

Stock A risk calculation:

Probabilities A r-rbar r-rbar^2 Pi*r-rbar

 (15%-11.2%)=
20% 15% 0.00144
0.038 0.0002888
(12%-
45% 12% 0.00006
11.2%)=0.080 0.00003
(8%-11.2%)=-
35% 8% 0.00102
0.032 0.0003584

Variance= σ2= ∑ (Pi)∗¿ ¿ (ri- r)2

i=1

Variance = 0.000676
Risk( standard deviation) = sqrt(variance)= 0.026
Stock B risk calculation:

r-
Probabilities B r-rbar Pi*r-rbar
rbar^2

(20%-
20% 20%
8%)=0.1200 0.0144 0.00288
(12%-
45% 12%
8%)=0.0400 0.0016 0.00072
(-4%-8%)=-
35% -4%
0.1200 0.0144 0.00504
n

Variance= σ2= ∑ (Pi)∗¿ ¿ (ri- r)2

i=1

Variance= 0.00864
Risk( standard deviation) = sqrt(variance)= 0.0929516

Portfolio returns calculation (50% and 50% weights)

n
portfolio returns=R p=∑ W i E ( R)i
i=1
= 50%*0.112 +50%*0.08 = 0.0960

Portfolio risk calculation:

Probabilities
x-xbar y-ybar P1*(x-xbar)*(y-ybar)
20% 0.038 0.12 0.000912
45% 0.008 0.04 0.000144
35% -0.032 -0.12 0.001344

Covariance=
n

Cov( X , Y ¿=∑ pi ( X i− ^
X i )( Y i−Y^i )
i=1

cov ( x , y )
Correlation= ρ= σx σy
…

Covariance= 0.00240
Correlation= 0.993073
Portfolio risk calculation :
Portfolio variance:
2 2 2
σ P= ( W x σ x ) + ( W y σ y ) +2 ( w x σ x )( w y σ y ) ρ x , y

Portfolio risk =0.005858