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 ???y = −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 e) portfolio by investing 70% in stock 1 and 30% in stock 2? f) 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
between the returns is ???y = −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
e) portfolio by investing 70% in stock 1 and 30% in stock 2?
f) Compute the
relationship between the returns for the two stocks.
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