Question
In: Finance
explain the assertion that the relationship between deviation on a portfolio and standard deviations of the...
explain the assertion that the relationship between deviation on a
portfolio and standard deviations of the assets in the portfolio is
not a simple one
Solutions
Expert Solution
The Portfolio return is the weighted average of the return of assets in the portfolio, i.e.
Return on Portfolio = Wa*Return(a) + Wb*Return(b)
where the Wa is the percentage of portfolio funds invested in stock A and Wb is the percentage of portfolio funds invested in stock B. Howvever the Standard Devaition of the portfolio is not the weighted avergae of individual stocks. The risk of portfolio (standard Deviation ) depends upon the degree of correlation between the returns of the securities. If it is -1, the risk of posrtfolio can be eliminated (i.e 0). However even if the correlation is negative, the total risk of portfolio can be reduced. On the other hand, if the correlation is perfect positive (+1), then SD of the portfolio will be the weighted average of SD of individual stocks.
Portfolio standard deviation will be calculated as
Example
Portfolio Return = 9%
Assuming Correlation = -1
Portfolio Risk (SD) = 
= 0.
Thus the Portfolio standard deviation is not a weighted average of individual stock SD but depends upon the correlation coefficient.
jeff jeffy answered 1 year agoRelated Solutions
Explain the assertion that the relationship between the standard deviation on a portfolio and standard deviations...
Explain the assertion that the relationship between the
standard deviation on a portfolio and standard deviations of the
assets in the portfolio is not a simple one.
a. Explain the assertion that the relationship between the standard deviation on a portfolio and standard...
a.
Explain the assertion that the relationship between the standard
deviation on a portfolio and standard deviations of the assets in
the portfolio is not a simple one.
Question 1) a. Explain the assertion that the relationship between the standard deviation on a portfolio...
Question 1)
a. Explain the assertion that the relationship between the
standard deviation on a portfolio and standard deviations of the
assets in the portfolio is not a simple one.
b. Briefly discuss the concept of the Security Market Line
(SML), and explain why all assets must plot
directly on it in a competitive market.
c. The dividend debate is inconclusive and still on-going in
the corporate world. In your view, briefly
discuss some real world factors that may support...
Question 1) a. Explain the assertion that the relationship between the standard deviation on a portfolio...
Question 1) a. Explain the assertion that the relationship
between the standard deviation on a portfolio and standard
deviations of the assets in the portfolio is not a simple one. b. Briefly discuss the concept of the Security Market Line
(SML), and explain why all assets must plot directly on it in a
competitive market. c. The dividend debate is
inconclusive and still on-going in the corporate world. In your
view, briefly discuss some real world factors that may support...
The standard deviation of a portfolio: Multiple Choice is a weighted average of the standard deviations...
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Multiple Choice
is a weighted average of the standard deviations of the
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is an arithmetic average of the standard deviations of the
individual securities which comprise the portfolio.
can never be less than the standard deviation of the most risky
security in the portfolio.
can be less than the standard deviation of the least risky
security in the portfolio.
must be equal to or greater than the lowest...
Portfolio Standard DeviationSuppose the expected returns and standard deviations of Stocks A and B are E(RA)...
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Here are returns and standard deviations for four investments. Return (%) Standard Deviation (%) Treasury bills...
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Return (%)
Standard Deviation (%)
Treasury bills
5.0
0
Stock P
11.5
16
Stock Q
14.5
28
Stock R
24.0
27
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a. 50% in Treasury bills, 50% in stock P.
(Enter your answer as a percent rounded to 2 decimal
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The standard deviation is equal to the square root of the average squared deviations about the...
The standard deviation is equal to the
square root of the average squared deviations about the mean. More
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is to calculate the variance. Complete the table below as the first
step in calculating the variance:
(10 points)
X
f
X−x
(X−x)2
96
1
94
1
92
1
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1
85
1
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1
83
1
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1...
Discuss, if there is any relationship between "point estimate", "the standard deviation", "the hypothesis testing" and...
Discuss, if there is any relationship between "point estimate",
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