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
3 | P a g e
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?