Suppose you are going to invest equal amounts in three stocks. The annual return from each stock
Question:
a. The three stock returns are highly correlated. The correlation between each pair is 0.9.
b. The three stock returns are practically independent. The correlation between each pair is 0.1.
c. The first two stocks are moderately correlated. The correlation between their returns is 0.4. The third stock’s return is negatively correlated with the other two. The correlation between its return and each of the first two is -0.8.
d. Compare the portfolio distributions from @RISK for these three scenarios. What do you conclude?
e. You might think of a fourth scenario, where the correlation between each pair of returns is a large negative number such as -0.8. But explain intuitively why this makes no sense. Try to run the simulation with these negative correlations and see what happens.
Stocks
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...
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Data Analysis and Decision Making
ISBN: 978-0538476126
4th edition
Authors: Christian Albright, Wayne Winston, Christopher Zappe
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