Question

Finding the correlation using the given information, what can one infer about the portoflio consisting of Snapchat and P&G?

Stock Name Stock Price Exp. Return Var Shares

SNAP $200.66 22.40% 0.266 50

PG $37.67 10.51% 0.147 50

Portfolio 0.01

a.

There is a positive relationship between the two stocks

b.

The stocks are moving apart from each other

c.

Not much risk is being mitigated by holding these two stocks

d.

All of the above

e.

A and C

Answer 1

b. The stocks are moving apart from each other

Standard deviation of portfolio =

where x and y are the securities

Weight of snapchat in the portfolio = 50*200.66/(50*200.66+50*37.67) = 0.8420

Weight of P&G the portfolio = 50*37.67/(50*200.66+50*37.67) = 0.1580

Standard deviation of Snapchat = 0.266^0.5 = 0.5157

Standard deviation of P&G =0.147^0.5 = 0.3834

Lets say if the correlation is 0, then

Portfolio variance =(0.5157*0.8420)^2 + (0.3834*0.1580)^2 = 0.1922

But the portfolio variance = 0.01

Hence, the correlation between both the stocks is lesser than 0. ie. negative. Hence, The stocks are moving apart from each other