Identify a sample of two oil companies for a five-year period of your choice. For

example, you could try Exxon Mobil Corp (XOM), Shell PLC (RDS-A) or BP PLC (BP). You

can use Yahoo! Finance to obtain this data. Calculate monthly and annual rates of return,

and annual standard deviations for these stocks. Use arithmetic average to find these values.

Comment on these returns and standard deviations.

a) Estimate beta and 𝑅

2

for each individual company, using Excel functions SLOPE and

RSQ. Comment on these values. Why is the evaluation of stock returns important for

investors?

[15%]

b) Explain what a correlation coefficient is and why it is important. What is the difference

between beta and correlation coefficients? Using the Excel function CORREL,

Applied Financial Economics – Final Examination June 2022

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calculate the correlation coefficient between the monthly returns of the stocks.

Comment on these values.

[15%]

c) Using average returns for these stocks, construct an equally weighted portfolio and

find its return. Then calculate the portfolio beta and 𝑅

2

. Comment on all of these

values. How does the 𝑅

2 of this portfolio compare with the average 𝑅

2 of the individual

stocks? Comment on these values of 𝑅

2 and why it is important in risk analyses.

Comment on this portfolio’s standard deviation. Will the risk change by constructing

a portfolio with these two stocks? Why?