The Capital Asset Pricing Model: Overview, Part I Questions
1. Stock X has a standard deviation of 10% and Stock Y has a standard deviation of 15%.
The correlation between the returns of Stock X and Stock Y is 0.25. What is the standard
deviation of an equally weighted portfolio of Stock X and Stock Y ?
2. Imagine an economy with two risky assets, A and B, whose standard deviations are 20% and
30%, respectively. If these assets are perfectly negatively correlated, compute the portfolio
weights that minimize the portfolio risk.
3. The file Data1.xlsx contains monthly returns for nine companies, from January 1990 to December 2019. Using the functions in Excel, perform the following calculations:
(a) Find each stock’s average monthly return (you can use the function “AVERAGE”).
(b) Find each stock’s standard deviation (you can use the function “STDEV.S”).
(c) Find the average monthly return of an equally-weighted portfolio of the nine stocks.
(d) Find the standard deviation of the portfolio.
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