7. Using historical data to measure portfolio risk and correlation coefficient Aa Aa Allison is an investor who believes that past variability of stocks is a reasonably good estimate of future risk associated with the stocks. Allison works on creating a new portfolio and has already purchased stock A. Now she considers two other stocks, B and C. Allison collected data on the historic rates of return for all three stocks, which are presented in the following table. Complete the table by calculating standard deviations for each stock: Year Stock A Stock B Stock C 2013 40% -5% 35% 2014 - 10% 40% -5% 2015 35% -10% -10% 2016 -5% 35% 40% 15.00 % 15.00 % 15.00 % Average return Standard deviation Suppose Allison can only afford to complement stock A by adding just one of the two other stocks, either stock B or stock C. Complete the following table by computing correlation coefficients between stocks A and B and between stocks A and C, and calculate average returns and standard deviation for the two potential portfolios, AB and AC: Stocks A and B Stocks A and C Correlation coefficient Average return Standard deviation % % Suppose Allison has to choose between two portfolios, AB and AC. Allison will be better off choosing Which of the following statements about portfolio diversifications are correct? Check all that apply. By adding enough partially correlated stocks, risk can be completely eliminated. Stocks with perfectly negatively correlated returns do not exist. The higher the stocks' correlation coefficients, the lower the portfolio's risk. The risk of a portfolio declines as the number of stocks in the portfolio increases