(Computing the standard deviation for a portfolo of two risky investments) Mary Guilott recently graduated from Nichols State University and is anxious to begin investing her meager savings as a way of applying what she has learned in business school. Specifically, she is evaluating an investment in a portfolio comprised of two firms' common stock. She has collected the following information about the common stock of FirmA and Firm B: a. If Mary invests half her money in each of the two common stocks, what is the portfolio's expected rate of return and standard deviation in portfolio return? b. Answer part a where the correlation between the two common stock investments is equal to zero. c. Answer part a where the correlation between the ha
(Computing the standard deviation for a portfolo of two risky investments) Mary Guilott recently graduated from Nichols State University and is anxious to begin investing her meager savings as a way of applying what she has learned in business school. Specifically, she is evaluating an investment in a portfolio comprised of two firms' common stock. She has collected the following information about the common stock of FirmA and Firm B: a. If Mary invests half her money in each of the two common stocks, what is the portfolio's expected rate of return and standard deviation in portfolio return? b. Answer part a where the correlation between the two common stock investments is equal to zero. c. Answer part a where the correlation between the ha
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
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Transcribed Image Text:(Computing the standard devlation for a portfolio of two risky Investments) Mary Guilott recently graduated from Nichols State
University and is anxious to begin investing her meager savings as a way of applying what she has learned in business school.
Specifically, she is evaluating an investment in a portfolio comprised of two firms' common stock. She has collected the following
information about the common stock of Firm A and Firm B: .
a. If Mary invests half her money in each of the two common stocks, what is the portfolio's expected rate of return and standard deviation
in portfolio return?
b. Answer part a where the correlation between the two common stock investments is equal to zero.
c. Answer part a where the correlation between the two common stock investments is equal to + 1.
d. Answer part a where the correlation between the two common stock investments is equal to - 1.
e. Using your responses to questions a-d, describe the relationship between the correlation and the risk and return of the portfolio.
c. I
bet
rrelation coefficient
Data Table
- X
The
d. I
bet
Expected
Return
Standard
Devlation
rolation coefficient
Firm A's common stock
Firm B's common stock
The
0.15
0.16
0.18
0.25
Correlation coefficient
e. U
the
0.50
(Click on the icon in order to copy its contonts into a spreadsheet.)
he correlation and
cient is to
Print
Done
cient is to one,
O D. The correlation coefficient has no effect on the expected return of a portfolio, but the closer the correlation coefficient is to
negative one,-1, the lower the risk
on coefficient is to
pa
fex
e t
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