A person is interested in constructing a portfolio. Two stocks are being considered. Let x = percent
Question:
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 σxy = - 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 a portfolio by investing 70% in stock 1 and 30% in stock 2?
e. Compute the correlation coefficient for x and y and comment on the relationship between the returns for the two stocks?
StocksStocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing... Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...
Step by Step Answer:
a The standard deviation for these two stocks is the square root of the variance s z Varx 25 5 s y V...View the full answer
Statistics For Business & Economics
ISBN: 9781285846323
12th Edition
Authors: David Anderson, Dennis Sweeney, Thomas Williams, Jeffrey Camm, James Cochran
