a. C. : Determine the covariances between (i.) A and C, (ii.) B and C, and, (iii.) A and B. Compute for the covariance between C and D. Compute for the expected standard deviation of D.
a. C. : Determine the covariances between (i.) A and C, (ii.) B and C, and, (iii.) A and B. Compute for the covariance between C and D. Compute for the expected standard deviation of D.
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
![2. Let random variables A and B be the monthly returns of stocks A and B, respectively. Let C be the
monthly returns of Crude Oil Index (WTI). Suppose
p(A,C) = correlation between A and C= 0.50
p(B,C) = correlation between B and C= -0.45
• p(A,B) = correlation between A and B = -0.15
o(A) = standard deviation of A = 0.45
o(B) = standard deviation of B = 0.75
o(C) = standard deviation of C= 0.55
Moreover, suppose you decided to form a portfolio D, which invests 60% in stock A and 40% in
stock B. Let random variable D be the monthly returns of portfolio D.
a.
b.
C.
Y
: Determine the covariances between (i.) A and C, (ii.) B and C, and, (iii.) A and B.
Compute for the covariance between C and D.
Compute for the expected standard deviation of D.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F87be90e1-f97b-4bdf-a1f1-e9d4767e5e2c%2Ffcd337b3-7360-4192-b55a-d86e8b32c958%2Fangewtl_processed.png&w=3840&q=75)
Transcribed Image Text:2. Let random variables A and B be the monthly returns of stocks A and B, respectively. Let C be the
monthly returns of Crude Oil Index (WTI). Suppose
p(A,C) = correlation between A and C= 0.50
p(B,C) = correlation between B and C= -0.45
• p(A,B) = correlation between A and B = -0.15
o(A) = standard deviation of A = 0.45
o(B) = standard deviation of B = 0.75
o(C) = standard deviation of C= 0.55
Moreover, suppose you decided to form a portfolio D, which invests 60% in stock A and 40% in
stock B. Let random variable D be the monthly returns of portfolio D.
a.
b.
C.
Y
: Determine the covariances between (i.) A and C, (ii.) B and C, and, (iii.) A and B.
Compute for the covariance between C and D.
Compute for the expected standard deviation of D.
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