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Bus 304: Homework #2
Due: Friday, September 9.
Part I (Use formulas and a calculator)
The following table is for Problems 1-3:
Probability
.10
.25
.20
.15
.30
Stock 1
.24
.16
.10
–.08
–.02
Rate of Return
Stock 2
.16
.11
.16
.09
.03
Stock 3
.12
.06
.10
.15
.23
1. Compute the expected rate of return for each of the three stocks.
2. Compute the variance and standard deviation for the three stocks.
3. Compute the population covariance and the correlation coefficient between stocks 1 and 2
and between stocks 1 and 3.
The following table is for Problems 4-6:
Year
1
2
3
4
5
6
Annual Rates of Return
ABC
S&P 500
0.07
0.01
– 0.03
– 0.02
0.06
0.06
0.03
– 0.05
0.06
0.05
0.10
0.02
4. Calculate the sample mean returns for ABC and the S&P 500 Index.
5. Calculate the sample covariance between returns for ABC and the S&P 500 Index.
6. Plot a graph showing the annual rates of return on ABC (vertical-axis) against the annual
returns of the S&P 500 Index (horizontal-axis). Draw a “line of best fit” through the data
points.
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Part II
CFA Problems from BKM 9th Ed. (pp. 157-158)
Chapter 5: #1, 2, 3, 4, 5, 6, 7
Part III
(a) Collect data for the S&P 500 Index and 6 stocks:
(1) S&P 500 Index
^GSPC
(2) Starbucks
SBUX
(3) Ford
F
(4) Nike
NKE
(5) Apple
AAPL
(6) Old Dominion Freight Line
ODFL
(7) A stock of your choosing
???
Download 5 years of monthly price data from Yahoo Finance into your copy of the Excel
spreadsheet 304.Stocks (MyNorthwestern).
Use monthly adjusted closing prices (Adj Close). Adjusted close means that the price is
adjusted for dividends and splits (recall HPR formula).
August 1, 2006 – August 1, 2011 (61 prices)
(b) Convert the adjusted prices into 60 months of return data.
61 prices will allow us to compute 60 returns.
HPR formula for Adj Close: HPR 
Ending price of a share  Beginning price
Beginning price
(c) Calculate the sample mean and sample variance for each company and the S&P500 index.
Use Excel’s statistical functions AVERAGE, VAR.