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An investor wants to see the diversification benefit of having two stocks instead of one in his portfolio, and the following table shows the characteristics of the two stocks. Standard Deviation Expected Return 0.1 0.3 a. Assume different weights for the two stocks and the correlation between the two stocks is 0.4. Fill in the following blank space. Stock X Stock Y Weights X 1 0.8 0.6 0.4 0.2 0 Y 0 0.2 0.4 0.6 0.8 1 Portfolio Expected Return 0.2 0.6 Portfolio Standard Deviation b. Plot the two stocks X, Y and the portfolios in part a) onto a diagram with the standard deviation on the X-axis, and expected return on the Y-axis. Is it better to have two stocks in the portfolio than one stock? How will the diagram change if the correlation coefficient is 1? Show the diagram. An investor wants to see the diversification benefit of having two stocks instead of one in his portfolio, and the following table shows the characteristics of the two stocks. Standard Deviation Expected Return 0.1 0.3 a. Assume different weights for the two stocks and the correlation between the two stocks is 0.4. Fill in the following blank space. Stock X Stock Y Weights X 1 0.8 0.6 0.4 0.2 0 Y 0 0.2 0.4 0.6 0.8 1 Portfolio Expected Return 0.2 0.6 Portfolio Standard Deviation b. Plot the two stocks X, Y and the portfolios in part a) onto a diagram with the standard deviation on the X-axis, and expected return on the Y-axis. Is it better to have two stocks in the portfolio than one stock? How will the diagram change if the correlation coefficient is 1? Show the diagram. An investor wants to see the diversification benefit of having two stocks instead of one in his portfolio, and the following table shows the characteristics of the two stocks. Standard Deviation Expected Return 0.1 0.3 a. Assume different weights for the two stocks and the correlation between the two stocks is 0.4. Fill in the following blank space. Stock X Stock Y Weights X 1 0.8 0.6 0.4 0.2 0 Y 0 0.2 0.4 0.6 0.8 1 Portfolio Expected Return 0.2 0.6 Portfolio Standard Deviation b. Plot the two stocks X, Y and the portfolios in part a) onto a diagram with the standard deviation on the X-axis, and expected return on the Y-axis. Is it better to have two stocks in the portfolio than one stock? How will the diagram change if the correlation coefficient is 1? Show the diagram. An investor wants to see the diversification benefit of having two stocks instead of one in his portfolio, and the following table shows the characteristics of the two stocks. Standard Deviation Expected Return 0.1 0.3 a. Assume different weights for the two stocks and the correlation between the two stocks is 0.4. Fill in the following blank space. Stock X Stock Y Weights X 1 0.8 0.6 0.4 0.2 0 Y 0 0.2 0.4 0.6 0.8 1 Portfolio Expected Return 0.2 0.6 Portfolio Standard Deviation b. Plot the two stocks X, Y and the portfolios in part a) onto a diagram with the standard deviation on the X-axis, and expected return on the Y-axis. Is it better to have two stocks in the portfolio than one stock? How will the diagram change if the correlation coefficient is 1? Show the diagram.
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Related Book For
Financial management theory and practice
ISBN: 978-1439078099
13th edition
Authors: Eugene F. Brigham and Michael C. Ehrhardt
Posted Date:
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