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Imagine a world in which there are only two investment assets: Hasbro Inc. Stock (HAS) and McDonalds stock (MCD). The table below lists annual total returns (%) for each of the last ten years (calculated based on adjusted closing prices for the first day of February in each month provided by YahooFinance (thank you Yahoo!). For each of the questions below, please write down the formula you would use to calculate these values by hand (or with a calculator) even if you use Excel or another program to calculate the values.
a. Based on these data, calculate the expected return on HAS and MCD.
b. What is the variance of the return for HAS? The standard deviation? Do the same calculations for MCD.
c. What is the covariance of HAS returns with MCD returns? What is the correlation of the two returns?
d. Evaluate the risk and return for a portfolio with each of the weight combinations below. Use the standard deviation-not the variance-to characterize risk. You may use the Excel file on SmartSite to calculate the answer, but do not forget to write the formula you would have used to do the calculation by hand below. Which of these portfolios would you definitely choose not to adopt, no matter your risk preferences? Why?
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