Stock X has an expected return of 8% and Stock Z has an expected return of 12%. The standard deviation of Stock X is 12% and the standard deviation of Stock Z is 8%. Assume that these are the only two stocks available in a hypothetical world.
If the correlation between the returns of the two stocks is +1:
What is the expected return and standard deviation of a portfolio containing:
100% Z
25% X and 75% Z
50% X and 50% Z
75% X and 25% Z
100% X
Will any investor include Stock X in his or her portfolio? Explain why or why not.
If the correlation between the returns of the two stocks is +0.3:
What is the expected return and standard deviation of a portfolio containing:
100% Z
25% X and 75% Z
50% X and 50% Z
75% X and 25% Z
100% X
Will any investor include Stock X in his or her portfolio (if the correlation is +0.3)? If so, what is the maximum amount of Stock X a rational investor might include in a portfolio? Support your answer numerically.
Stock X has an expected return of 8% and Stock Z has an expected return of 12%. The standard deviation of Stock X is 12% and the standard deviation of Stock Z is 8%. Assume that these are the only two stocks available in a hypothetical world.
If the correlation between the returns of the two stocks is +1:
What is the expected return and standard deviation of a portfolio containing:
100% Z
25% X and 75% Z
50% X and 50% Z
75% X and 25% Z
100% X
Will any investor include Stock X in his or her portfolio? Explain why or why not.
If the correlation between the returns of the two stocks is +0.3:
What is the expected return and standard deviation of a portfolio containing:
100% Z
25% X and 75% Z
50% X and 50% Z
75% X and 25% Z
100% X
Will any investor include Stock X in his or her portfolio (if the correlation is +0.3)? If so, what is the maximum amount of Stock X a rational investor might include in a portfolio? Support your answer numerically.