A person is interested in constructing a portfolio. Two stocks are being considered. Let x = percent return for an investment in stock 1, and y = percent return for an investment in stock 2. The expected return and variance for stock 1 are E(x) = 8.45% and Var (x) = 25. The expected return and variance for stock 2 are E(y) = 3.20% and Var (y) = 1. The covariance between the returns is σxy = −3.a. What is the standard deviation for an investment in stock 1 and for an investment in stock 2? Using the standard deviation as a measure of risk, which of these stocks is the riskier investment?b. What is the expected return and standard deviation, in dollars, for a person who invests $500 in stock 1?c. What is the expected percent return and standard deviation for a person who constructs a portfolio by investing 50% in each stock?d. What is the expected percent return and standard deviation for a person who constructs a portfolio by investing 70% in stock 1 and 30% in stock 2?e. Compute the correlation coefficient for x and y and comment on the relationship between the returns for the two stocks.
A person is interested in constructing a portfolio. Two stocks are being considered. Let x = percent return for an investment in stock 1, and y = percent return for an investment in stock 2. The expected return and variance for stock 1 are E(x) = 8.45% and Var (x) = 25. The expected return and variance for stock 2 are E(y) = 3.20% and Var (y) = 1. The covariance between the returns is σxy = −3.a. What is the standard deviation for an investment in stock 1 and for an investment in stock 2? Using the standard deviation as a measure of risk, which of these stocks is the riskier investment?b. What is the expected return and standard deviation, in dollars, for a person who invests $500 in stock 1?c. What is the expected percent return and standard deviation for a person who constructs a portfolio by investing 50% in each stock?d. What is the expected percent return and standard deviation for a person who constructs a portfolio by investing 70% in stock 1 and 30% in stock 2?e. Compute the correlation coefficient for x and y and comment on the relationship between the returns for the two stocks.
A person is interested in constructing a portfolio. Two stocks are being considered. Let x = percent return for an investment in stock 1, and y = percent return for an investment in stock 2. The expected return and variance for stock 1 are E(x) = 8.45% and Var (x) = 25. The expected return and variance for stock 2 are E(y) = 3.20% and Var (y) = 1. The covariance between the returns is σxy = −3.a. What is the standard deviation for an investment in stock 1 and for an investment in stock 2? Using the standard deviation as a measure of risk, which of these stocks is the riskier investment?b. What is the expected return and standard deviation, in dollars, for a person who invests $500 in stock 1?c. What is the expected percent return and standard deviation for a person who constructs a portfolio by investing 50% in each stock?d. What is the expected percent return and standard deviation for a person who constructs a portfolio by investing 70% in stock 1 and 30% in stock 2?e. Compute the correlation coefficient for x and y and comment on the relationship between the returns for the two stocks.
A person is interested in constructing a portfolio. Two stocks are being considered. Let x = percent return for an investment in stock 1, and y = percent return for an investment in stock 2. The expected return and variance for stock 1 are E(x) = 8.45% and Var (x) = 25. The expected return and variance for stock 2 are E(y) = 3.20% and Var (y) = 1. The covariance between the returns is σxy = −3. a. What is the standard deviation for an investment in stock 1 and for an investment in stock 2? Using the standard deviation as a measure of risk, which of these stocks is the riskier investment? b. What is the expected return and standard deviation, in dollars, for a person who invests $500 in stock 1? c. What is the expected percent return and standard deviation for a person who constructs a portfolio by investing 50% in each stock? d. What is the expected percent return and standard deviation for a person who constructs a portfolio by investing 70% in stock 1 and 30% in stock 2? e. Compute the correlation coefficient for x and y and comment on the relationship between the returns for the two stocks.
Definition Definition Statistical measure used to assess the strength and direction of relationships between two variables. Correlation coefficients range between -1 and 1. A coefficient value of 0 indicates that there is no relationship between the variables, whereas a -1 or 1 indicates that there is a perfect negative or positive correlation.
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