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Chapter 6
Chapter 6
1990 74.17%
1991 122.01%
1992 15.09%
1993 -5.43%
1994 51.29%
1995 43.59%
1996 88.33%
1997 56.39%
1998 114.61%
Total 560.03%
Divided by 9
Average An 62.23%
Year Annual Return Average Annual Return Difference Difference Squared
1989 80.95%
Scientific Atlanta AT&T 1990 -47.37%
1989 80.95% 58.26% 1991 31.00%
1990 -47.37% -33.79% 1992 132.44%
1991 31.00% 29.88% 1993 32.02%
1992 132.44% 30.35% 1994 25.37%
1993 32.02% 2.94% 1995 -28.57%
1994 25.37% -4.29% 1996 0.00%
1995 -28.57% 28.86% 1997 11.67%
1996 0.00% -6.36% 1998 36.19%
1997 11.67% 48.64% Total of Difference Squared
1998 36.19% 23.55% Divided by (Number of Data - 1)
Total 273.70% 178.04% Variance
Divided by Number of Data 10 10 Standard Deviation (Square Root of Varian
Average Annual Return 27.37% 17.80%
Year Annual Return
1989 58.26%
1990 -33.79%
1991 29.88%
1992 30.35%
1993 2.94%
1994 -4.29%
1995 28.86%
1996 -6.36%
1997 48.64%
1998 23.55%
Total of Difference Squared
Divided by (Number of Data - 1)
Variance
Standard Deviation (Square Root of Varian
Variance = ((W1^2)*(SD1^2))+((W2^2*(SD2^2))+(2*(W1*W2*SD1*SD2*C)
Variance = ((60%^2)*(51.36%^2))+((50%^2)*(27.89%^2))+(2*50%*50%*51.36%*27.89%*54.07%)
Variance = 12.41%
Covariance
Average Annual Return Difference Difference Squared Divided by Product of each company's Standard Deviat
Correlation
22.59% 47.02% 22.11%
22.59% -63.17% 39.90%
22.59% 7.85% 0.62%
22.59% 58.81% 34.58%
22.59% -5.11% 0.26%
22.59% -12.05% 1.45%
22.59% -22.44% 5.04%
22.59% -25.77% 6.64%
22.59% 7.57% 0.57%
22.59% 7.28% 0.53%
ence Squared 111.70%
mber of Data - 1) 9
12.411%
35.23%
.36%*27.89%*54.07%)
Scientific Atlanta AT&T
Average Annual Return Difference Annual Return Average Annual Return Difference
27.37% 53.58% 58.26% 17.80% 40.46%
27.37% -74.74% -33.79% 17.80% -51.59%
27.37% 3.63% 29.88% 17.80% 12.08%
27.37% 105.07% 30.35% 17.80% 12.55%
27.37% 4.65% 2.94% 17.80% -14.86%
27.37% -2.00% -4.29% 17.80% -22.09%
27.37% -55.94% 28.86% 17.80% 11.06%
27.37% -27.37% -6.36% 17.80% -24.16%
27.37% -15.70% 48.64% 17.80% 30.84%
27.37% 8.82% 23.55% 17.80% 5.75%
7.74%
ct of each company's Standard Deviat 14.32%
54.07%
Quote = 15
Given:
W1 = Weight 1 60%
W2 = Weight 2 40%
SD1 = Standard Deviation Coca - Cola 36%
SD2 = Standard Deviation Texas Utility 22%
C = Correlation 28%
Variance = ((W1^2)*(SD1^2))+((W2^2*(SD2^2))+(2*(W1*W2*SD1*SD2
Variance = ((60%^2)*(36%^2))+((40%^2)*(22%^2))+(2*60%*40%*36
Variance = 6.50%
W1 = Weight 1 60%
W2 = Weight 2 40%
SD1 = Standard Deviation Coca - Cola 36%
SD2 = Standard Deviation Texas Utility 22%
C = Correlation 28%
/((SD2^2)+(SD1^2)-(2*SD2*SD1*C))
%)))/((22%^2)+(36%^2)-(2*22%*36%*28%))
/((SD1^2)+(SD2^2)-(2*SD2*SD1*C))
%)))/((36%^2)+(22%^2)-(2*36%*22%*28%))
Quote = 8
Given:
W1 = Weight 1 60%
W2 = Weight 2 40%
SD1 = Standard Deviation Coca - Cola 45%
SD2 = Standard Deviation Texas Utility 22%
C = Correlation 20%
Variance = ((W1^2)*(SD1^2))+((W2^2*(SD2^2))+(2*(W1*W2*SD1*SD2
Variance = ((60%^2)*(45%%^2))+((40%^2)*(22%^2))+(2*60%*40%*
Variance = 9.01%
W1 = Weight 1 60%
W2 = Weight 2 40%
SD1 = Standard Deviation Coca - Cola 45%
SD2 = Standard Deviation Texas Utility 22%
C = Correlation 20%
/((SD2^2)+(SD1^2)-(2*SD2*SD1*C))
%)))/((22%^2)+(45%^2)-(2*22%*45%*20%))
/((SD1^2)+(SD2^2)-(2*SD2*SD1*C))
%)))/((45%^2)+(22%^2)-(2*45%*22%*20%))
Quote = 10
If Correlation Coefficient is -1
Given:
W1 = Weight 1 50%
W2 = Weight 2 50%
SD1 = Standard Deviation Times Mirror 25%
SD2 = Standard Deviation Unilever 40%
C = Correlation -1
Variance = ((W1^2)*(SD1^2))+((W2^2*(SD2^2))+(2*(W1*W2*SD1*SD2*C)
Variance = ((50%^2)*(45%%^2))+((50%^2)*(22%^2))+(2*50%*50%*45%*22%*20%)
Variance = 0.56250%
Given:
W1 = Weight 1 50%
W2 = Weight 2 50%
SD1 = Standard Deviation Times Mirror 25%
SD2 = Standard Deviation Unilever 40%
C = Correlation -0.8
Variance = ((W1^2)*(SD1^2))+((W2^2*(SD2^2))+(2*(W1*W2*SD1*SD2*C)
Variance = ((50%^2)*(45%%^2))+((50%^2)*(22%^2))+(2*50%*50%*45%*22%*20%)
Variance = 1.56250%
Given:
W1 = Weight 1 50%
W2 = Weight 2 50%
SD1 = Standard Deviation Times Mirror 25%
SD2 = Standard Deviation Unilever 40%
C = Correlation -0.6
Variance = ((W1^2)*(SD1^2))+((W2^2*(SD2^2))+(2*(W1*W2*SD1*SD2*C)
Variance = ((50%^2)*(45%%^2))+((50%^2)*(22%^2))+(2*50%*50%*45%*22%*20%)
Variance = 2.56250%
Given:
W1 = Weight 1 50%
W2 = Weight 2 50%
SD1 = Standard Deviation Times Mirror 25%
SD2 = Standard Deviation Unilever 40%
C = Correlation -0.4
Variance = ((W1^2)*(SD1^2))+((W2^2*(SD2^2))+(2*(W1*W2*SD1*SD2*C)
Variance = ((50%^2)*(45%%^2))+((50%^2)*(22%^2))+(2*50%*50%*45%*22%*20%)
Variance = 3.56250%
Given:
W1 = Weight 1 50%
W2 = Weight 2 50%
SD1 = Standard Deviation Times Mirror 25%
SD2 = Standard Deviation Unilever 40%
C = Correlation -0.2
Variance = ((W1^2)*(SD1^2))+((W2^2*(SD2^2))+(2*(W1*W2*SD1*SD2*C)
Variance = ((50%^2)*(45%%^2))+((50%^2)*(22%^2))+(2*50%*50%*45%*22%*20%)
Variance = 4.56250%
If Correlation Coefficient is 0
Given:
W1 = Weight 1 50%
W2 = Weight 2 50%
SD1 = Standard Deviation Times Mirror 25%
SD2 = Standard Deviation Unilever 40%
C = Correlation 0
Variance = ((W1^2)*(SD1^2))+((W2^2*(SD2^2))+(2*(W1*W2*SD1*SD2*C)
Variance = ((50%^2)*(45%%^2))+((50%^2)*(22%^2))+(2*50%*50%*45%*22%*20%)
Variance = 5.56250%
Given:
W1 = Weight 1 50%
W2 = Weight 2 50%
SD1 = Standard Deviation Times Mirror 25%
SD2 = Standard Deviation Unilever 40%
C = Correlation 0.2
Variance = ((W1^2)*(SD1^2))+((W2^2*(SD2^2))+(2*(W1*W2*SD1*SD2*C)
Variance = ((50%^2)*(45%%^2))+((50%^2)*(22%^2))+(2*50%*50%*45%*22%*20%)
Variance = 6.56250%
Given:
W1 = Weight 1 50%
W2 = Weight 2 50%
SD1 = Standard Deviation Times Mirror 25%
SD2 = Standard Deviation Unilever 40%
C = Correlation 0.4
Variance = ((W1^2)*(SD1^2))+((W2^2*(SD2^2))+(2*(W1*W2*SD1*SD2*C)
Variance = ((50%^2)*(45%%^2))+((50%^2)*(22%^2))+(2*50%*50%*45%*22%*20%)
Variance = 7.56250%
Given:
W1 = Weight 1 50%
W2 = Weight 2 50%
SD1 = Standard Deviation Times Mirror 25%
SD2 = Standard Deviation Unilever 40%
C = Correlation 0.6
Variance = ((W1^2)*(SD1^2))+((W2^2*(SD2^2))+(2*(W1*W2*SD1*SD2*C)
Variance = ((50%^2)*(45%%^2))+((50%^2)*(22%^2))+(2*50%*50%*45%*22%*20%)
Variance = 8.56250%
Given:
W1 = Weight 1 50%
W2 = Weight 2 50%
SD1 = Standard Deviation Times Mirror 25%
SD2 = Standard Deviation Unilever 40%
C = Correlation 0.8
Variance = ((W1^2)*(SD1^2))+((W2^2*(SD2^2))+(2*(W1*W2*SD1*SD2*C)
Variance = ((50%^2)*(45%%^2))+((50%^2)*(22%^2))+(2*50%*50%*45%*22%*20%)
Variance = 9.56250%
Standard Deviation of Portfolio 30.92%
If Correlation Coefficient is 1
Given:
W1 = Weight 1 50%
W2 = Weight 2 50%
SD1 = Standard Deviation Times Mirror 25%
SD2 = Standard Deviation Unilever 40%
C = Correlation 1
Variance = ((W1^2)*(SD1^2))+((W2^2*(SD2^2))+(2*(W1*W2*SD1*SD2*C)
Variance = ((50%^2)*(45%%^2))+((50%^2)*(22%^2))+(2*50%*50%*45%*22%*20%)
Variance = 10.56250%
%*45%*22%*20%)
%*45%*22%*20%)
%*45%*22%*20%)
%*45%*22%*20%)
%*45%*22%*20%)
%*45%*22%*20%)
%*45%*22%*20%)
%*45%*22%*20%)
%*45%*22%*20%)
%*45%*22%*20%)
Quote = 10
W1 = Weight 1 33.33%
W2 = Weight 2 33.33%
W3 = Weight 3 33.33%
SD1 = Standard Deviation Sony 23%
SD2 = Standard Deviation Tesoro 27%
SD3 = Standard Deviation Storage Tech 50%
C1 = Correlation of Sonny to Tesoro - 0.15
C2 = Correlation of Sony to Storage Tech 0.20
C3 = Correlation of Tesoro to Storage Tech - 0.25
Variance = ((W1^2)*(SD1^2))+((W2^2*(SD2^2))+((W3^2*(SD3^2))+(2*(W1*W2*SD1*
Variance = ((33.33%^2)*(23%%^2))+((33.33%^2)*(27%^2))+((33.33%^2)*(50%^2))+
Variance = 3.7297%
W1 = Weight 1 80%
W2 = Weight 2 20%
SD1 = Standard Deviation - Vanguard 25%
SD2 = Standard Deviation - Treasury Bill 0%
C = Correlation 0%
Variance = ((W1^2)*(SD1^2))+((W2^2*(SD2^2))+(2*(W1*W2*SD1*SD2*C)
Variance = ((80%^2)*(25%%^2))+((20%^2)*(0%^2))+(2*80%*20%*25%*0%*0%)
Variance = 4.00%
a. IF you don't want to have a standard deviation in your returns, invest it all to riskless assets
Market Riskless
Average Return 15% 5%
15%x-5%x = 12% - 5%
10%x = 7%
x= 70%
Quote = 10 Year Annual Return
1989 80.95%
Scientific Atlanta Market Portfolio 1990 -47.37%
1989 80.95% 31.49% 1991 31.00%
1990 -47.37% -3.17% 1992 132.44%
1991 31.00% 30.57% 1993 32.02%
1992 132.44% 7.58% 1994 25.37%
1993 32.02% 10.36% 1995 -28.57%
1994 25.37% 2.55% 1996 0.00%
1995 -28.57% 37.57% 1997 11.67%
1996 0.00% 22.68% 1998 36.19%
1997 11.67% 33.10% Total of Difference Squared
1998 36.19% 28.32% Divided by (Number of Data - 1)
Total 273.70% 201.05% Variance
Divided by Number of Data 10 10
Average Annual Return 27.37% 20.11%
Year Annual Return
1989 31.49%
1990 -3.17%
1991 30.57%
1992 7.58%
1993 10.36%
1994 2.55%
1995 37.57%
1996 22.68%
1997 33.10%
1998 28.32%
Total of Difference Squared
Divided by (Number of Data - 1)
Variance
Average Annual Return Difference Difference Squared Year Scientific Atlanta
Annual Return
27.37% 53.58% 28.71% 1989 80.95%
27.37% -74.74% 55.86% 1990 -47.37%
27.37% 3.63% 0.13% 1991 31.00%
27.37% 105.07% 110.40% 1992 132.44%
27.37% 4.65% 0.22% 1993 32.02%
27.37% -2.00% 0.04% 1994 25.37%
27.37% -55.94% 31.29% 1995 -28.57%
27.37% -27.37% 7.49% 1996 0.00%
27.37% -15.70% 2.46% 1997 11.67%
27.37% 8.82% 0.78% 1998 36.19%
ifference Squared 237.38%
y (Number of Data - 1) 9 Year Scientific Atlanta
26.38% Difference
1989 53.58%
1990 -74.74%
Average Annual Return Difference Difference Squared 1991 3.63%
1992 105.07%
20.11% 11.39% 1.30% 1993 4.65%
20.11% -23.28% 5.42% 1994 -2.00%
20.11% 10.47% 1.10% 1995 -55.94%
20.11% -12.53% 1.57% 1996 -27.37%
20.11% -9.75% 0.95% 1997 -15.70%
20.11% -17.56% 3.08% 1998 8.82%
20.11% 17.46% 3.05% Total
20.11% 2.57% 0.07% Divided by (Number of Data - 1)
20.11% 13.00% 1.69% Covariance
20.11% 8.22% 0.67%
ifference Squared 18.89% Covariance
y (Number of Data - 1) 9 Divided by Variance of Market Portfolio
2.10% Beta
Scientific Atlanta Market Portfolio
Average Annual Return Difference Annual Return Average Annual Return
27.37% 53.58% 31.49% 20.11%
27.37% -74.74% -3.17% 20.11%
27.37% 3.63% 30.57% 20.11%
27.37% 105.07% 7.58% 20.11%
27.37% 4.65% 10.36% 20.11%
27.37% -2.00% 2.55% 20.11%
27.37% -55.94% 37.57% 20.11%
27.37% -27.37% 22.68% 20.11%
27.37% -15.70% 33.10% 20.11%
27.37% 8.82% 28.32% 20.11%
-0.1307%
ce of Market Portfolio 2.10%
- 0.0623
tfolio
Difference
11.39%
-23.28%
10.47%
-12.53%
-9.75%
-17.56%
17.46%
2.57%
13.00%
8.22%
Quote = 7
Beta 1.5
Multiply by Variance of Market Portfolio 4.84%
Covariance 7.26%
Covariance 7.26%
Divided by Product of each portfolio's Standard Deviation 14.52%
Correlation 50.00%
Correlation 50.00%
Multiply b yCorrelation 50.00%
United Airlines' proportional risk to Market Risk 25.00%