Consider two stocks, X and Y, with expected returns x = 15.7% and y= 12.3% and...
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Consider two stocks, X and Y, with expected returns x = 15.7% and y= 12.3% and with standard deviations ox = 7.1% and oy = 4.9% for those returns. The two assets have a correlation, p, of 0.5. a. What is the covariance of the returns of stocks X and Y? (Hint: compute the covariance using the definition of the population correlation, p) In general, will constructing a portfolio from these two stocks reduce or increase the risk compared to the individual stocks? Briefly explain. b. What is the expected return and standard deviation of a portfolio which is 80% stock X and 20% stock Y? c. What is the expected return and standard deviation of a portfolio which is 50% stock X and 50% stock Y? d. What is the expected return and standard deviation of a portfolio which is 20% stock X and 80% stock Y? e. Which of the portfolios above, either (b), (c), or (d), offers the best combination of risk and return? Briefly explain. Consider two stocks, X and Y, with expected returns x = 15.7% and y= 12.3% and with standard deviations ox = 7.1% and oy = 4.9% for those returns. The two assets have a correlation, p, of 0.5. a. What is the covariance of the returns of stocks X and Y? (Hint: compute the covariance using the definition of the population correlation, p) In general, will constructing a portfolio from these two stocks reduce or increase the risk compared to the individual stocks? Briefly explain. b. What is the expected return and standard deviation of a portfolio which is 80% stock X and 20% stock Y? c. What is the expected return and standard deviation of a portfolio which is 50% stock X and 50% stock Y? d. What is the expected return and standard deviation of a portfolio which is 20% stock X and 80% stock Y? e. Which of the portfolios above, either (b), (c), or (d), offers the best combination of risk and return? Briefly explain.
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a Covariance Calculation and Portfolio Risk Covariance Formula CovX Y poxay where p is the correlati... View the full answer
Related Book For
Corporate Finance
ISBN: 9781265533199
13th International Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe
Posted Date:
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