Question

In: Finance

You have gathered information about the expected returns and standard deviations of two stocks, which is...

You have gathered information about the expected returns and standard deviations of two stocks, which is given in the table below:


Expected return

Standard deviation

Stock A

16.0%

20.0%

Stock B

12.0%

30.0%

a. Discuss which stock is more attractive and why? (hint: think about the assumptions first)

You are going to form a portfolio, which includes these two stocks. You will purchase shares of company A for $750 000 and shares of B for $250 000.

b. It is estimated that the correlation between the stock returns is -0.20. Explain, what does this result mean?

c. Calculate the portfolio risk and expected return, and explain the benefits of diversification.

(Show your work, you may upload the solution file)

Solutions

Expert Solution

Stock A is Very attractive.

Portfolio Risk = 15.37%

Portfolio Expected Return = 15%

We diversify portfolio Because we have to reduce the Portfolio Risk

Explanation Given Below

jeff jeffy answered 1 year ago
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