Week 2 Exercise

Due date:
Submission method:

Question 1

The following is return data for a retail sector ETF and energy sector ETF for the years, Year 1
to Year 5.

Year Retail Sector ETF Energy Sector ETF

1 –0.27 0.45
2 –0.31 –0.44
3 0.72 0.33
4 0.29 0.13
5 0.1 –0.03

a) What is the arithmetic mean return for each ETF?

Retail Sector
M= (-0.27)+(-0.31)+0.72+0.29+0.1 / 5 = 0.11
Energy Sector
M= 0.45+(0.44)+0.33+0.13+(-0.03) / 5 = 0.09
b) What is the geometric mean return for each ETF?
Retail Sector
GR=√5 ( 1±0.27 )( 1+−0.31 ) ( 1+0.72 )( 1+0.29 )( 1+0.1 )−1 = 0.275366
Energy Sector
GR=√5 (1+0.45)(1+−0.44 )(1+ 0.33)(1+ 0.13)(1+−0.03)−1 = 0.26826

c) What is the sample standard deviation for each ETF? Which ETF was riskier over this time
period?
Retail Sector
2 2 2 2 2
S2 = (−0.27−0.11) + (−0.31−0.11) + (0.72−0.11) + (0.29−0.11) + (0.1−0.11) = 0.1009
5
S = 0.3176
Energy Sector
2 2 2 2 2
S2 = = (0.45−0.09) + (−0.44−0.09) + (0.33−0.09) + (0.13−0.09) + (−0.03−0.09) = 0.0261
5
S = 0.0510
The riskier sector is retail since it has the highest variance

d) Given a risk-free rate of 5%, what is the Sharpe Ratio for each ETF? Which investment had a
better return per unit of risk over this time period?
Retail sector Energy Sector
 0.11−5 0.09−5
Sharpe Ratio = = -15.3967 Sharpe Ratio = = -96.27
0.3176 0.0510
Retail sector offer more reward per unit risk than the energy sector

Question 2

The mean starting salary of recent business graduates at a university is $52,000 with a standard
deviation of $16,000. The distribution of starting salaries is unknown.
a) What proportion of business graduates has a starting salary between $20,000 and $84,000?
The salary $20,000 is two standard deviations below the mean (x̄ - 2s) = $52,000 –
2($16,000) = $20,000, while the salary $84,000 is two standard deviations above the mean (x̄
- 2s) = $52,000 + 2($16,000) = $84,000
b) Suppose 600 business graduates from this university got hired. How many of them started
with a salary between $20,000 and $84,000?
k = 2 so we have 1 – 1/2² = 0.75 or 75%. Chebychev’s theorem asserts that at least 75% of
the salary will fall between $20,000 and $84,000 or 0.75(600)= 450 business graduates
started with a salary between $20,000 and $84,000

Question 3

The following data represent the number of unique visitors and the revenue a website generated
for the months of July through December.

  Unique Visitors Revenue

July 26 2.2
August 18 3.4
September 14 6.2
October 22 8.6
November 55 5.6
December 75 5.8

a) What is the sample standard deviation for the number of unique visitors and the revenue?
Unique Visitors
M= 26+18+14+22+55+75/6= 35
2 2 2 2 2 2
S2= (26−35) + (18−35) + (14−0 35) + (22−35) + (55−35) +¿ (75−35) = 596
6
S = 24.41311
Revenue
M=2.2+3.4+6.2+8.6+5.6+5.8/6=5.3
2 2 2 2 2 2
S2= (2.2−5.3) + (3.4−5.3) + (6.2−5.3) + (8.6−5.3) + (5.6−5.3) +¿ (5.8−5.3) = 5.052
6
S= 2.247665
b) Calculate the coefficient of variations. Which variable has a higher relative dispersion?
 Unique visitors
CV=S/M 24.41311/35 = 0.6975
Revenue
CV=S/M 2.247665/5= 0.4495
Unique visitor has a higher relative dispersion
c) Calculate the sample correlation coefficient between the number of unique visitors and
Revenue.
d) Comment on the strength of the linear relationship. What does this mean for the owner of the
website?

Question 4
The following gives summary measures for Google and Apple for Year 1–5.

= 66% = 20%

  = 89% = 60.5%

a) Which fund had the higher arithmetic average return? Apple

b) Which fund was riskier over this time period? Apple, since it has higher standard deviation
c) Given a risk-free rate of 1%, which fund has the higher Sharpe ratio? What does this imply?
Apple Google
6−1 20−1
Sharpe ratio = = 0.056 Sharpe ratio= = 0.31
89 60.5
Google has higher Sharpe ratio and offer more reward per unit risk than apple