1. You wish to invest in a portfolio of stocks A (50%) and B (50%). The risk free rate is 4%.
A B
Expected return (%) 10 20
Beta 1.2 1.8
Correlation coefficient between returns 0.3
Whatâs the portfolio return? (In percent without % sign, E.g. 33)
2. Whatâs the portfolio beta in Question 1?
3. The risk reduction through diversification in a portfolio of two stocks
a. decreases as the correlation between the stocks rises.
b. (Not enough information.)
c. increases as the correlation between the stocks declines.
d. (Both statements are correct.)
1. You wish to invest in a portfolio of stocks A (50%) and B (50%). The risk free rate is 4%.
A B
Expected return (%) 10 20
Beta 1.2 1.8
Correlation coefficient between returns 0.3
Whatâs the portfolio return? (In percent without % sign, E.g. 33)
2. Whatâs the portfolio beta in Question 1?
3. The risk reduction through diversification in a portfolio of two stocks
| a. | decreases as the correlation between the stocks rises. |
| b. | (Not enough information.) |
| c. increases as the correlation between the stocks declines. |
| d. (Both statements are correct.) |
Related questions
1) You wish to invest in a portfolio of stocks A (50%) and B (50%). The risk free rate is 4%.
A B
Expected return (%) 10 20
Beta 1.2 1.8
Correlation coefficient between returns 0.3
Whatâs the portfolio return?
| a)24% |
| b) | 30% |
| c)11% |
| d) 15% |
2) Whatâs the portfolio beta in Question 1?
| a) | 3 |
| b) | 1.5 |
| c) | 1.2 |
| d) 1.8 |
The variance for Steady Corpâs stock is 3.6%; the variance for Techie Corpâs stock is 14.4%. Whatâs the variance for a portfolio of (25%, 75%) of these two stocks, if the correlation coefficient between the two stocksâ returns is 0?
| 4.5% |
| 10.2% |
| 9% |
| 8.3% |
How would your answer to the last question change if the correlation coefficient increases?
| Variance of the portfolio increases as the correlation between the stocks increases, which means a larger degree of diversification. |
| Variance of the portfolio increases as the correlation between the stocks declines, which means a larger degree of diversification. |
| Variance of the portfolio increases as the correlation between the stocks increases, which means less diversification. |
| Variance of the portfolio increases as the correlation between the stocks declines, which means less diversification. |
