Given two stocks with E(r1) = 8%, E(r2) = 10%, σ1 = 15%, σ2 = 20%. Calculate the expected returns and standard deviations of a two-stock portfolio under each of the following conditions: (a) w1 = 0.70, w2 = 0.30, ρ = 0.3; (b) w1 = 0.50, w2 = 0.50, ρ = 0; (c) w1 = 0.30, w2 = 0.70, ρ = −0.3. Here wi is the weight of stock i in the portfolio, ρ is the correlation between the two stock returns.
Given two stocks with E(r1) = 8%, E(r2) = 10%, σ1 = 15%, σ2 = 20%. Calculate the expected returns and standard deviations of a two-stock portfolio under each of the following conditions: (a) w1 = 0.70, w2 = 0.30, ρ = 0.3; (b) w1 = 0.50, w2 = 0.50, ρ = 0; (c) w1 = 0.30, w2 = 0.70, ρ = −0.3. Here wi is the weight of stock i in the portfolio, ρ is the correlation between the two stock returns.
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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Given two stocks with E(r1) = 8%, E(r2) = 10%, σ1 = 15%, σ2 = 20%. Calculate the expected
returns and standard deviations of a two-stock portfolio under each of the following conditions:
(a) w1 = 0.70, w2 = 0.30, ρ = 0.3;
(b) w1 = 0.50, w2 = 0.50, ρ = 0;
(c) w1 = 0.30, w2 = 0.70, ρ = −0.3.
Here wi is the weight of stock i in the portfolio, ρ is the correlation between the two stock
returns.
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