Two stocks have the same return and risk (standard deviation): 10 percent return with 20 percent risk.

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Two stocks have the same return and risk (standard deviation): 10 percent return with 20 percent risk. You form a portfolio with 50 percent each of stock 1 and stock 2 to examine the effect of correlation on risk.

1. Calculate the portfolio return and risk if the correlation is 1.0.

2. Calculate the portfolio return and risk if the correlation is 0.0.

3. Calculate the portfolio return and risk if the correlation is –1.0.

4. Compare the return and risk of portfolios with different correlations.

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Investments Principles Of Portfolio And Equity Analysis

ISBN: 9780470915806

1st Edition

Authors: Michael McMillan, Jerald E. Pinto, Wendy L. Pirie, Gerhard Van De Venter, Lawrence E. Kochard

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