### Complete the covariance and correlation coefficient

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##### Reference no: EM13882951

This dataset contains annual total returns between 1926-2012 from investments in several classes of assets. Segment the data into two time periods, 1926-1965 and 1966-2012, and then answer the following questions for both periods.

Questions:

1) Compute historical means, variances, and standard deviations of returns for each asset-class for the time periods.

2) Using returns on S&P500 common stocks and returns on long-term government bonds, address the following questions:

a) Complete the covariance and correlation coefficient between the returns of the 2 asset classes.

b) Study portfolios of these two asset-classes in the following manner.Let "W" be the weight of investmentin S&P500 stocks and let the weight in long term government bonds be "(l-w)". Allow "w" to vary from -.05 to 1.5 in increments of .05 (thatis, consider short sales also).Using your estimates of mean, standard deviation, and correlation that are relevant to these two asset-classes, construct a table showing for each portfolio, (combination of weights), the mean and standard deviation of returns.

c) Graph these portfolios in standard deviation/mean space with standard deviation on the x-axis and the mean on the y-axis.Label all relevant points on the portfolio frontier, including the locations of the two individual asset classes, and the short sales segments of the frontier.Contrast the impact of the choice of estimation histories on portfolio formation by superimposing the two portfolio frontiers derived from the two different time periods in a single graph.Comment on the results.

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