) Stock X has an expected return of 8% and the standard deviation of the expected...
- ) Stock X has an expected return of 8% and the standard deviation of the expected return is 9%. Stock Z has an expected return of 10% and the standard deviation of the expected return is 7%. The correlation between the returns of the two stocks is +0.5. These are the only two stocks in a hypothetical world.
- What is the expected return and the standard deviation of a portfolio consisting of 100% Stock X? Will any rational investor hold this portfolio (in this hypothetical two stock world)? Explain why or why not.
- What is the expected return and the standard deviation of a portfolio consisting of 100% Stock Z? Will any rational investor hold this portfolio (in this hypothetical two stock world)? Explain why or why not.
Homework Answers
What is the expected return and the standard deviation of a
portfolio consisting of 100% Stock X? Will any rational investor
hold this portfolio (in this hypothetical two stock world)? Explain
why or why not.
Expected return=8%
Standard deviation=9%
No one will hold this stock as Z has lower risk or standard
deviation and higher return hence everyone will want Z
What is the expected return and the standard deviation of a
portfolio consisting of 100% Stock Z? Will any rational investor
hold this portfolio (in this hypothetical two stock world)? Explain
why or why not.
Expected return=10%
Standard deviation=7%
No one will hold this stock as for the same return, portfolio of X
and Z will have lower risk than X and Z individually
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