Question: Suppose you have 100,000 of savings to invest. Since you learnt in your Masters studies that you should not put all the eggs in one

Suppose you have £100,000 of savings to invest. Since you learnt in your Master’s studies that you should not ‘’put all the eggs in one basket’’, you are considering different stocks to diversify.

Suppose 60% of your portfolio comprises Amazon stocks and the remainder in Boeing. Amazon currently earns a return of 3.1% with a standard deviation of 15.8%. Boeing earns 9.5% return and has a standard deviation of 23.7%.

a) Calculate the expected return of the portfolio?

b) Would it be possible to diversify by adding Boeing to Amazon stock since it has higher standard deviation? If yes, why?

c) Calculate the standard deviation of the portfolio if the correlation coefficient is 1, 0.4, -1? Which correlation offers the best potential for diversification?

d) Plot the portfolio on the capital market line if the risk free rate is 1.5%. Be sure to plot Amazon and Boeing as well?

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Answer a Weight of Amazon stock w A 60 Weight of Boeing stock w B 1w A 160 40 Expected return of Amazon stock r A 31 Expected return of Boeing stock r ... View full answer

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