question archive Consider two different stocks, X and Y, with expected returns ?X = 17
Consider two different stocks, X and Y, with expected returns ?X = 17
Subject:MathPrice: Bought3
Consider two different stocks, X and Y, with expected returns ?X = 17.0% and ?Y = 14.9% and with standard deviations ?X = 12.4% and ?Y = 10.0% for those returns. The two assets have a correlation, p?, of -0.7.
a. What is the covariance of the returns of stocks X and Y? (Hint: use the definition of the population correlation ? to compute the covariance) In general, will constructing a portfolio from these two stocks reduce or increase the risk compared to the individual stocks? Briefly explain.
b. What is the expected return and standard deviation of a portfolio made up of stocks X and Y which is 20% stock X (the remainder stock Y)?
c. What is the expected return and standard deviation of a portfolio made up of stocks X and Y which is 50% stock X?
d. What is the expected return and standard deviation of a portfolio made up of stocks X and Y which is 80% stock X? e. Which of the portfolios above, either (b), (c), or (d), offers the best combination of risk and return? Briefly explain.
