Stocks A and B each have an expected return of 15%, a standard deviation of 20%, and a beta of 1.2. The returns on the two stocks have a correlation coefficient of +0.6. You have a portfolio that consists of 50% A and 50% B. Which of the following statements is CORRECT?
Stocks A and B each have an expected return of 15%, a standard deviation of 20%, and a beta of 1.2. The returns on the two stocks have a correlation coefficient of +0.6. You have a portfolio that consists of 50% A and 50% B. Which of the following statements is 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? (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.) |
- Consider two stocks, A and B.
|
|
Expected return (%) |
Standard deviation (%) |
|
Stock A |
24 |
28 |
|
Stock B |
19 |
23 |
The returns on the two stocks have a positive correlation of 0.6. You are required to calculate the portfolio return and risk.
Suppose that the investor wants to reduce the portfolio risk to 15%. How much should the correlation coefficient be to bring the portfolio risk to the desired level?
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 |
