Question

The correlation between stocks A and B is 0.50, while the correlation between stocks A and...

The correlation between stocks A and B is 0.50, while the correlation between stocks A and C is −0.5. You already own Stock A and are thinking of buying either Stock B or stock C. If you want your portfolio to have the lowest possible risk, would you buy stock B or C? Would you expect the stock you choose to affect the return that you earn on your portfolio?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

The lower the correlation of the assets that we are adding in the portfolio , with the existing assets in the portfolio. The greater the investor can enjoy the benefits of diversification in the portfolio as a result of which the risk in the portfolio will be minimised to the minimum.

In this case, the investor has a positive correlation with asset B, and a negative correlation with asset C :

We should never add all the eggs in the same basket ,although the level of correlation is same that is 0.5, one has a positive correlation with A , and asset C has a negative correlation. Hence we will enjoy greater diversification if we add asset C with a negative correlation.As asset C seems to be fro a different asset class.

Yes, as the risk will be reduced the expected returns will also be expected to improve upon addition of Asset C.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Suppose you have three stocks A, B, C the three stocks have the same expected return...
Suppose you have three stocks A, B, C the three stocks have the same expected return and the same standard deviation. If you know that the correlation coefficient between each pair of stocks are as follows: The correlation between A and B is +0.9 The correlation between A and C is 0.1 The correlation between B and C is -0.6 You want to form a portfolio consists of two securities Given the correlations above, a portfolio constructed of which pair...
Ceteris paribus, given the following correlation coefficients between pairs of stocks, a portfolio constructed from which...
Ceteris paribus, given the following correlation coefficients between pairs of stocks, a portfolio constructed from which pair will have the lowest standard deviation? Correl (A,B) = -1, Correl (C,D) = 1, Correl (E,F) = 0.75, Correl (G,H) = -0.75, Correl(I,J) = -0.50. a. Pair C,D b. Pair I,J c. Pair G,H d. Pair A,B e. Pair E,F
Stocks A and B have expected returns of 8% and 10%, and standard deviations of 12%...
Stocks A and B have expected returns of 8% and 10%, and standard deviations of 12% and 18%, respectively. Calculate the expected return and standard deviation of equally weighted portfolios of the two stocks if the correlation between the two stocks is 0.5? Repeat the calculation for correlation of 0 and ?0.5. If you could set the correlation between the two stocks, which of the three values would you choose? Explain.
Answer the questions below using the following information on stocks A, B, and C. A B...
Answer the questions below using the following information on stocks A, B, and C. A B C Expected Return 13% 13% 10% Standard Deviation 12% 10% 10% Beta 1.6 2 0.5                          Assume the risk-free rate of return is 4% and the expected market return is 10% Calculate the required return for stocks A, B, and C. Assuming an investor with a well-diversified portfolio, which stock would the investor want to add to his portfolio? Assuming an investor who will...
Stocks A and B have a correlation coefficient of -0.8. The stocks' expected returns and standard...
Stocks A and B have a correlation coefficient of -0.8. The stocks' expected returns and standard deviations are in the table below. A portfolio consisting of 40% of stock A and 60% of stock B is constructed. Stock Expected Return Standard Deviation A 20% 25% B 15% 19% Refer to Exhibit 8.14. What percentage of stock A should be invested to obtain the minimum risk portfolio that contains stock A and B? a. 42% b. 58% c. 65% d. 72%...
The following information is available for two stocks: Stock Shares Price per share Expected Return Standard...
The following information is available for two stocks: Stock Shares Price per share Expected Return Standard Deviation A 500 $40 14% 18% B 400 $25 21% 22% You are fully invested in the two stocks. The correlation coefficient between the two stock returns is .80 a. Compute the weights of the two stocks in your portfolio. b. Compute the portfolio expected return. c. Compute the portfolio standard deviation. d. You consider selling 250 shares of stock A, and buy with...
Arbor Systems and Gencore stocks both have a volatility of 45%. Compute the volatility of a...
Arbor Systems and Gencore stocks both have a volatility of 45%. Compute the volatility of a portfolio with 50% invested in each stock if the correlation between the stocks is (a )+1.00 , (b )0.50 (c )0.00 (d ) ?0.50 , and (e )?1.00. In which of the cases is the volatility lower than that of the original stocks?
QUESTION 4 (8 Marks) You are considering investing either of the three stocks- A, B and...
QUESTION 4 You are considering investing either of the three stocks- A, B and C. The following table provides the information regarding the stocks Returns (in percent) Probability Stock A Stock B Stock C 0.20 2 -3 5 0.50 10 8 8 ? 15 20 12 Based on the above information Calculate the expected rate of returns and variance for each of the three stocks?                                                                                                                Calculate the coefficient of variation for each security?                                    c) Your friend suggests you...
The expected return on stocks A and B are 20%, and 30%, respectively. The standard deviation...
The expected return on stocks A and B are 20%, and 30%, respectively. The standard deviation of stocks A and B are 20%, and 40%, respectivley. The correlation coefficient between the two stocks is negative one. You plan to form a portfolio from stocks A and B that will yield zero risk. What proportions of your money will you invest in stock A?
Suppose that the index model for stocks A and B is estimated from excess returns with...
Suppose that the index model for stocks A and B is estimated from excess returns with the following results: ?A = 3% + 0.7 RM+ ?A ?B = −2% + 1.2RM + ?A ?A-square= 0.20 ; ?B-square= 0.12, varianceM = 20% ; a. What is the standard deviation of each stock? b. Break down the variance of each stock to the systematic and firm-specific components. c. What are the covariance and correlation coefficient between the two stocks? d. What is...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT