Stocks offer an expected rate of return of 18%, with a standard deviation of 22%. Gold offers
Question:
a. In light of the apparent inferiority of gold with respect to both mean return and volatility, would anyone hold gold? If so, demonstrate graphically why one would do so.
b. Given the data above, reanswer ( a ) with the additional assumption that the correlation coefficient between gold and stocks equals 1. Draw a graph illustrating why one would or would not hold gold in one’s portfolio. Could this set of assumptions for expected returns, standard deviations, and correlation represent an equilibrium for the security market?
Stocks
Stocks 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...
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a Even though it seems that gold is dominated by stocks gold might still be an attractive ass...View the full answer
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