Attached are historical US industry portfolio returns. The objective of this exercise is to explore the risk-reward relationship across US industries.
1. Calculate the expected return for each industry portfolio.
2. Calculate the standard deviation for each industry portfolio.
3. Calculate the correlation between expected returns and standard deviations.
4. Replicate the plot below by plotting the expected returns against the standard deviations.
- In finance, we will interpret average returns as a reward and standard deviations as a risk of investing. Looking at your plot, is there a risk-reward relationship? If so, describe it.
- What does the correlation coefficient calculated above communicate to us?