1) Stock 1 has a standard deviation of return of 7%. Stock 2 has a standard deviation of return of 1%. The correlation coefficient between the two stocks is 0.5. If you invest 60% of your funds in stock 1 and 40% in stock 2, what is the standard deviation of your portfolio? You decide now to combine your portfoliowith another portfolio with the same standard deviation and invest equally in both portfolios. The correlation between the two portfolios is zero. 2) What is the standard deviation of this new portfolio? 3) Is diversification achieved from combining the uncorrelated portfolios with idential risk.
1) Stock 1 has a standard deviation of return of 7%. Stock 2 has a standard deviation of return of 1%. The correlation coefficient between the two stocks is 0.5. If you invest 60% of your funds in stock 1 and 40% in stock 2, what is the standard deviation of your portfolio? You decide now to combine your portfoliowith another portfolio with the same standard deviation and invest equally in both portfolios. The correlation between the two portfolios is zero. 2) What is the standard deviation of this new portfolio? 3) Is diversification achieved from combining the uncorrelated portfolios with idential risk.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
1) Stock 1 has a standard deviation of return of 7%. Stock 2 has a standard deviation of return of 1%. The correlation coefficient between the two stocks is 0.5. If you invest 60% of your funds in stock 1 and 40% in stock 2, what is the standard deviation of your portfolio?
You decide now to combine your portfoliowith another portfolio with the same standard deviation and invest equally in both portfolios. The correlation between the two portfolios is zero.
2) What is the standard deviation of this new portfolio?
3) Is diversification achieved from combining the uncorrelated portfolios with idential risk.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 5 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education