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MGMT610 Risk Management

Task
RA Assignment Project
The goal of this project is to explore the topics of covariance and correlation. The project requires you to work in Excel with the provided spreadsheet. Be sure to fill in the yellow boxes in the Excel file for full credit and show all work by referencing cells where necessary (do not simply type in answers).
 
In addition, type up a report in Word (1-2 pages) with a separate section for the introduction (description of the project), findings (answer assignment questions, plots, etc.), and conclusion (conclusions, summary). Make sure to follow all directions or points will be deducted. This is an individual project so be sure to submit your own work. Upon completion, please submit both your Word report and Excel file. Each question (A, B, C, D, E) in the Excel file is worth 18 points.
Covariance and Correlation
The following table shows the expected returns from six different stocks in three different states of the economy:

State of Economy

Probability

Return Stock A

Return Stock B

Return Stock C

Return Stock D

Return Stock E

Return Stock F

Growth

1/3

30%

3%

15%

24%

0%

18%

Status Quo

1/3

22%

1%

3%

6%

3%

3%

Recession

1/3

20%

4%

-3%

-6%

6%

-3%


A)Calculate the expected return for each stock. (18 Points)
 
B)Calculate the standard deviation for each stock. (18 Points)
 
C)Consider of a portfolio consisting of 50% in Stock A and 50% in Stock B. Calculate the covariance between Stocks A and B.
 
Calculate the expected return of the portfolio. Calculate the standard deviation of the portfolio. (18 Points)
 
D)Consider of a portfolio consisting of 50% in Stock C and 50% in Stock D. Calculate the covariance between Stocks C and D.
 
Calculate the expected return of the portfolio. Calculate the standard deviation of the portfolio. (18 Points)
 
E)Consider of a portfolio consisting of 50% in Stock E and 50% in Stock F. Calculate the covariance between Stocks E and F.
 
Calculate the expected return of the portfolio. Calculate the standard deviation of the portfolio. (18 Points)

In your report, for each portfolio describe the correlation between the two stocks. In addition, describe the impact on risk of including the two stocks in a larger portfolio of stocks.
Formulae:
standard deviation Formula

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