Asked by marissa ciavatta on Jun 26, 2024
Verified
A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35%, while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is .45. Stock A comprises 40% of the portfolio, while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is ________.
A) 23%
B) 19.76%
C) 18.45%
D) 17.67%
Correlation Coefficient
A statistical measure that calculates the strength of the relationship between the relative movements of two variables.
Standard Deviation
A measure of the dispersion or variability of a set of data points or investment returns, indicating the degree of risk.
Portfolio
A collection of various investments held by an individual, company, or financial institution.
- Gain an understanding of the notions of risk and expected return in the context of portfolio theory.
- Acquire knowledge about the basics of diversification and its influence on minimizing risk in a portfolio.
- Comprehend the importance of the correlation coefficient and covariance in the construction of portfolios.
Verified Answer
MI
Mohanad IbrahimJun 27, 2024
Final Answer :
B
Explanation :
σ2p = (.402)(.352) + (.602)(.15)2 + (2)(.4)(.6)(.35)(.15)(.45)
σ2p = .039046
σp = 19.76%
σ2p = .039046
σp = 19.76%
Learning Objectives
- Gain an understanding of the notions of risk and expected return in the context of portfolio theory.
- Acquire knowledge about the basics of diversification and its influence on minimizing risk in a portfolio.
- Comprehend the importance of the correlation coefficient and covariance in the construction of portfolios.