Financial Managers, Inc., buys and sells a large number of stocks routinely for the various accounts that it manages. Portfolio manager Sarah Bloom has asked for your assistance in the analysis of the Burde Fund. A portion of this portfolio consists of 10 shares of stock A and 8 shares of stock B. The price of A has a mean of 12 and a variance of 14, while the price of B has a mean of 10 and a variance of 12. The correlation between prices is 0.5.a. What are the mean and variance of the portfolio value?b. Sarah has been asked to reduce the variance (risk) of the portfolio. She offers to trade the 10 shares of stock A and receives two offers from which she can select one: 10 shares of stock 1 with a mean price of 12, a variance of 25, and a correlation with the price of stock B equal to -0.2; or 10 shares of stock 2 with a mean price of 10, a variance of 9, and a correlation with the price of stock B, equal to +0.5. Which offer should she select?
Correlation
Correlation defines a relationship between two independent variables. It tells the degree to which variables move in relation to each other. When two sets of data are related to each other, there is a correlation between them.
Linear Correlation
A correlation is used to determine the relationships between numerical and categorical variables. In other words, it is an indicator of how things are connected to one another. The correlation analysis is the study of how variables are related.
Regression Analysis
Regression analysis is a statistical method in which it estimates the relationship between a dependent variable and one or more independent variable. In simple terms dependent variable is called as outcome variable and independent variable is called as predictors. Regression analysis is one of the methods to find the trends in data. The independent variable used in Regression analysis is named Predictor variable. It offers data of an associated dependent variable regarding a particular outcome.
Financial Managers, Inc., buys and sells a large number of stocks routinely for the various accounts that it manages. Portfolio manager Sarah Bloom has asked for your assistance in the analysis of the Burde Fund. A portion of this portfolio consists of 10 shares of stock A and 8 shares of stock B. The price of A has a
a. What are the mean and variance of the portfolio value?
b. Sarah has been asked to reduce the variance (risk) of the portfolio. She offers to trade the 10 shares of stock A and receives two offers from which she can select one: 10 shares of stock 1 with a mean price of 12, a variance of 25, and a correlation with the price of stock B equal to -0.2; or 10 shares of stock 2 with a mean price of 10, a variance of 9, and a correlation with the price of stock B, equal to +0.5. Which offer should she select?
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