Why do most assets of the same type show positive covariances of returns with each other? Would you expect positive covariances of returns between different types of assets such as returns on Treasury bills, General Electric common stock, and commercial real estate? Why or why not?
Answer to relevant QuestionsWhat is the relationship between covariance and the correlation coefficient?Explain how a given investor chooses an optimal portfolio. Will this choice always be a diversified portfolio, or could it be a single asset? Explain your answer.You are considering two assets with the following characteristics.E(R1) = 0:15 E(σ1) = 0:10 w1 = 0:5E(R2) = 0:20 E(σ2) = 0:20 w2 = 0:5Compute the mean and standard deviation of two portfolios if r1,2 = 0.40 and −0.60, ...What changes would you expect in the standard deviation for a portfolio of between 4 and 10 stocks, between 10 and 20 stocks, and between 50 and 100 stocks?Assume that you expect the economy’s rate of inflation to be 3 percent, giving an RFR of6 percent and a market return (RM) of 12 percent.a. Draw the SML under these assumptions.b. Subsequently, you expect the rate of ...
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