Use monthly total returns for the S&P 500 index, Xcel Energy (XEL), NVIDIA (NVDA), Bank of America (BAC), and Tesco PLC (TSCO) from July 2012 through June 2017.
a) Create an XY (Scatter) plot to show the relationship between the returns on each individual stock and the S&P 500. Estimate the slope of a regression equation of this data.
b) Add a linear trend line to each chart, and place the equation and R2 on each chart. How much of the variability in each stock’s returns can be explained by variability in the S&P 500?
c) Repeat the previous two questions with an equally weighted portfolio that includes all of these stocks. Use the arithmetic average of the monthly returns of each stock as the expected return in your portfolio. Do you see any improvements in the R-square?
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