a) In light of the apparent inferiority of gold with respect to both mean return and volatility, would anyone hold gold? If so, demonstrate graphically why one would do so. b) Given the data above, reanswer a) with the additional assumption that the correlation coefficient between gold and stocks equals 1. Draw a graph illustrating why one would or would not hold gold in one’s portfolio. Could this set of assumptions for expected returns, standard deviations, and correlation represent an equilibrium for the security market?
Contingency Table
A contingency table can be defined as the visual representation of the relationship between two or more categorical variables that can be evaluated and registered. It is a categorical version of the scatterplot, which is used to investigate the linear relationship between two variables. A contingency table is indeed a type of frequency distribution table that displays two variables at the same time.
Binomial Distribution
Binomial is an algebraic expression of the sum or the difference of two terms. Before knowing about binomial distribution, we must know about the binomial theorem.
Stocks offer an expected rate of return of 18%, with a standard
deviation of 22%. Gold offers an expected return of 10% with a standard deviation of 30%.
a) In light of the apparent inferiority of gold with respect to both mean return and volatility, would anyone hold gold? If so, demonstrate graphically why one would do so.
b) Given the data above, reanswer a) with the additional assumption that the
coefficient between gold and stocks equals 1. Draw a graph illustrating why one would
or would not hold gold in one’s portfolio. Could this set of assumptions for expected
returns, standard deviations, and correlation represent an equilibrium for the security
market?
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