Can diversification produce benefits if the correlation

Assignment Help Financial Management

Reference no: EM131997536

Stock X and Stock Z both have an expected return of 12%. The standard deviation of the expected return is 10% for Stock X and 14% for Stock Z. Assume that the correlation between these two stocks is +0.3.

A. If you MUST hold one of these two stocks in isolation, which one would you select, and why?

B. What is the expected return and the standard deviation of a portfolio that includes 50% Stock X and 50% Stock Z?

C. If you must hold a two-stock portfolio consisting only of Stock X and Stock Z, what is the optimal percentage (between 0% and 100%) of the portfolio to put in Stock X? Stock Z?

D. Can diversification produce benefits if the correlation between two stocks is greater than zero? Explain why the answer is yes, using your answers to parts B and C.

E. Why is it likely (in reality) that the correlation between the returns offered by most stocks will be positive?

Reference no: EM131997536

Questions Cloud

Voters perceptions about the bureaucracy : What would ou do to change either the size o government or to change the voters' perceptions about the bureaucracy?

President bush the ability to negotiate textile : Congress would not give President Bush the ability to negotiate textile quotas with two allies crucial to the fight against terrorism.

Prepare a pension worksheet for eagle homes : For 2014, prepare a pension worksheet for Eagle Homes that shows the journal entry for pension expense

Calculate the price that reflects the fundamental value : Calculate the price that reflects the fundamental value of the stock.(3) If the price is now $80 per share, should stock Y be purchased?(1)

Can diversification produce benefits if the correlation : Can diversification produce benefits if the correlation between two stocks is greater than zero?

Strengths and weaknesses of policy borne of compromise : What do you see to be the potential strengths and weaknesses of policy borne of compromise?

Calculate your forecast of gl : The stock is expected to have a year-end dividend of $4 per share (D1 = $4), and it is expected to grow at some constant rate gL throughout time.

Influence the congress and the president : What tactics and methods does it use to influence the Congress and the president?

Should do in the face of fascism : What would Arendt's theory suggest we should do in the face of fascism, if it does indeed rise in the United States? Provide specific examples.

User Account

All Pages