Question

In: Finance

A portfolio is composed of two stocks, Air New Zealand and BP. Air New Zealand has...

A portfolio is composed of two stocks, Air New Zealand and BP. Air New Zealand has a standard deviation of return of 28%, while stock BP has a standard deviation of return of 16%. Air New Zealand 40% of the portfolio, while stock BP comprises 60% of the portfolio. If the variance of return on the portfolio is .045, what is the correlation coefficient between the returns on A and B?

Solutions

Expert Solution

Standard deviation Air New Zealand 0.28
Standard deviation BP 0.16
W (A) 0.4
W (B) 0.6
Variance of portfolio 0.45
Correlation coefficient= standard deviation of portfolio/ standard deviation of stock A* standard deviation of stock B
Standard deviation of portfolio= Square root of variance of portfolio
square root of .45 =.671
Correlation coefficient= 0.671/0.28*0.16 = 0.1496

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