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28 Sep 2019
This is a table about possible rates of return on Stock A and B:
State of the economy Probability Stock A Stock B Deep recession 0.05 -20% -30% Mild recession 0.25 10% 5% Average 0.35 15% 20% Mild boom 0.20 20% 25% Strong boom 0.15 25% 30%
The following data have been calculated:
SD(A) = 9.34%, SD(B) = 13.68%, Covariance between Stock A & B = 124.38%, Correlation between Stock A & B = 0.9735
(a) Would it be advisable to form a portfolio of both Stock A and B to diversify risk? Explain reasons in words.
(b) Short-selling either stock is allowed (ie. weights need not be all positive), find the minimun variance one can get by forming a portfolio of Stock A and B.
This is a table about possible rates of return on Stock A and B:
| State of the economy | Probability | Stock A | Stock B |
| Deep recession | 0.05 | -20% | -30% |
| Mild recession | 0.25 | 10% | 5% |
| Average | 0.35 | 15% | 20% |
| Mild boom | 0.20 | 20% | 25% |
| Strong boom | 0.15 | 25% | 30% |
The following data have been calculated:
SD(A) = 9.34%, SD(B) = 13.68%, Covariance between Stock A & B = 124.38%, Correlation between Stock A & B = 0.9735
(a) Would it be advisable to form a portfolio of both Stock A and B to diversify risk? Explain reasons in words.
(b) Short-selling either stock is allowed (ie. weights need not be all positive), find the minimun variance one can get by forming a portfolio of Stock A and B.
Bunny GreenfelderLv2
28 Sep 2019