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  3. 4. diversification can eliminate risk if two event

4. Diversification can eliminate risk if two events are perfectly negatively correlated. Suppose that two firms...

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Finance

4. Diversification can eliminate risk if two events areperfectly negatively correlated. Suppose that two firms arecompeting for a government contract and have an equal chance ofwinning. Because only one firm can win, the other must lose, so thetwo events are perfectly negatively correlated. You can buy a shareof stock in either firm for $20. The stock of the firm that winsthe contract will worth $40, while the stock of the loser willworth $10. • If you buy two shares of one firm, calculate theexpected value and variance of two shares. • If you buy one shareon each firm, calculate the expected value and variance of twoshares.

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Answer Let the two companys be A and B Given Price of stock A or B 20 The sock of the company that wins the contract 40 The stock of the company that looses the contract 10 The    See Answer
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