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During the year ended 2014, the current BOJ 90-day Treasury bill rate stood at 4.5%. Hence, most investors believe that to optimize portfolios, an ideal combination of both stocks and bonds should be held. Hence, Jonny Cash has a two stock portfolio that is equally weighted comprising stock A and B. While, Mr Smart has another portfolio with stock X and Y which are weighted 60% and 40% respectively. Below are the returns of the stocks in both portfolios: Stock A Stock B Stock X Stock Y January 12% 10% 16% -6% February -5% 2% 4% 10% March 8% 3% 4% 2% Required: a. Calculate the average returns on each stock. [ 4 marks] b. Calculate the expected returns on each portfolio. [ 6 marks] c. Calculate the standard deviations of each stock [ 24 marks] d. Calculate the covariance between Stock A and B [ 6 marks] e. Calculate the covariance between Stock X and Y [ 6 marks] f. Calculate the correlation coefficient for each portfolios [ 4 marks] g. Calculate the standard deviation of Mr Smart’s and Mr Cash’s portfolio[10 marks] h. Which portfolio is more efficient? Note: show the necessary calculations to corroborate your answer.
Individuals that continually monitor the financial markets seeking mispriced securities:
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