Assume that the number of shares outstanding in the two stocks from question 5 has not changed
Question:
Assume that the number of shares outstanding in the two stocks from question 5 has not changed over the last ten years. Compute the returns on equal weighted and value weighted portfolios of the two stocks (not the ETF). The return on an equal weighted portfolio is just the 50/50 average of the returns of the two stocks. The return on the value weighted portfolio is w1 R1 + w2 R2, where Ri is the return on stock i and wi is the market capitalization of stock i divided by the sum of the market capitalizations of both stocks.
What are the correlations between the each of the stocks and the value weighted portfolio? What are the correlations with the equal weighted portfolio? Why do you think that some correlations are higher than others?
Financial Reporting and Analysis
ISBN: 978-1259722653
7th edition
Authors: Lawrence Revsine, Daniel Collins, Bruce Johnson, Fred Mittelstaedt, Leonard Soffer