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Asset Pricing

In: Business and Management

Submitted By Akkakarania
Words 362
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Untitled courtesy: http://loja3d.com/essay-on/Statistic-Stock-Case/37900 Question 1 Use Stock.xls data set to solve the problems of annual returns on investment of three stocks. Characterize the key features of the returns on investment on each stock. After use the data analysis tool of excel, we can get the following solutions. We can see that stock2 has a largest mean, standard deviation and sample variance. It means that stock has a much more higher expected value than the other two stocks. However, the standard deviation and sample variance reveal the risk level of losing money in stock market. Stock2 has a higher expected value with a higher level of risk. Then, in order to visually understand the feature of return on investment for each stock, we will build some histograms relatively. Then we can use Excel to construct the histograms as follow:

Excel automatically generates 10 bins for the histograms which is calculate by the range of each stocks /10. This histogram has two peaks – -0.27607 and 0.100033 whose relative frequency are both 15. That means if we invest in stock 1, the most possible outcome of expected return would be -0.27607 or 0.100033.

This histogram which has only one peak 0.40169 whose relative frequency is 23. It seems that the most possible expected return from investing in stock 2 would be 0.401089.

This histogram has only one peak –0.01111 whose relative frequency is 23. It seems that the most possible expected return from investing in stock 3 would be -0.01111. As in a whole, stock 2 has a higher frequency and positive expected value in investing, it may be the best choice among these three stocks. b. Construct a portfolio that maximizes the expected return. The formula for the expected return is E (Rp) =w1 E (R1) +w2 E (R2) +w3 E (R3) W means the weight of each stock, and E(Ri) is the expected return. We can get a…...

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