Question

In: Finance

What do you notice about the average of the volatilities of the individual stocks, compared to...

What do you notice about the average of the volatilities of the individual stocks, compared to the volatility of the equally weighted portfolio?

Reward Equally Weighted Portfolio
Ave Mon Return 1.34% 0.66% 0.82% 2.71% 1.39% 0.23% 1.21% 0.53% -0.13% 1.80% 2.35% 0.38% 1.11%
Annual Return 16.12% 7.87% 9.87% 32.48% 16.66% 2.82% 14.47% 6.36% -1.58% 21.62% 28.23% 4.55% 13.29%
Risk
Std Dev Monthly 5.35% 5.32% 6.06% 6.75% 6.50% 4.72% 7.40% 5.28% 5.10% 5.74% 6.15% 3.78% 3.05%
Std Dev Annual 18.53% 18.42% 20.98% 23.39% 22.51% 16.34% 25.65% 18.29% 17.67% 19.87% 21.31% 13.08% 10.58%

Solutions

Expert Solution

The volatilities of individual stocks are higher as compared to the volatility of the equally weighted portfolio. The reason responsible for this conculsion is the correlation between these stocks. If the correlation between these stocks is negative, then the net volatility of the equally weighted portfolio decreases. Hence, it is recommended to diversify the portfolio to lower the risk and on a whole the volatility.


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