year stock A stock B 2015 3 % 40% 2016 5 % -5% 2017 1 % 30% 2018 10...

50.1K

Verified Solution

Question

Finance

year stock A stock B
2015 3 % 40%
2016 5 % -5%
2017 1 % 30%
2018 10 % -10%
2019 6 % 35 %
(1) Determine the correlation coefficient of returns of stocks Aand B. Can you reduce risk by creating a portfolio of thecombination of both stocks? why or why not?
(2) if you invest 80% of money in stock A and another 20% instock B, calculate expected rate of return and standard deviationof this portfolio. Is this portfolio better than the individualstock A and B? why

Answer & Explanation Solved by verified expert

4.0 Ratings (598 Votes)

YearStock AStock B201534020165520171302018101020196351 Expected Return of Stock A ERA 3511065 5Expected Return of Stock B ERB 4053010355 18If n is the sample size then the variance of the sample iscalculated using below formulawhere Ri is the return in different years and ER isthe expected return as calculated aboveVariance of Stock A A2 143525521521052652A2 000400001600025000014 000115Therefore standard deviation of Stock A A 00011512 003391165 339Variance of Stock B B2 See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

year stock A stock B2015 3 % 40%2016 5 % -5%2017 1 % 30%2018 10 % -10%2019 6 % 35 %(1) Determine the correlation coefficient of returns of stocks Aand B. Can you reduce risk by creating a portfolio of thecombination of both stocks? why or why not?(2) if you invest 80% of money in stock A and another 20% instock B, calculate expected rate of return and standard deviationof this portfolio. Is this portfolio better than the individualstock A and B? why