Information on stocks E & F which have a correlation coefficient of 0.5 appear below: Stock E
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Question:
Information on stocks E & F which have a correlation coefficient of 0.5 appear below:
Stock E | Stock F | |
Expected Return | 20% | 30% |
Standard Deviation | 0.4 | 0.5 |
Your uncle has savings of $20,000 and was thinking of investing 70% of this amount in stock E and the remainder in stock F.
Required:
- Calculate the expected return and standard deviation of your uncle's portfolio.
- Demonstrate by appropriate calculations whether or not diversification has been achieved by combining these two stocks in a portfolio
- Your uncle is worried about taking risks as he is close to retirement age. Advise him on what actions he could take to establish a portfolio that is less risky. Provide calculations to show that the proposed portfolio is less risky.
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
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