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 ago
Next > < Previous

Related 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...
The standard deviation of a portfolio: Multiple Choice is a weighted average of the standard deviations of the individual securities held in the portfolio. 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)...
Portfolio Standard DeviationSuppose the expected returns and standard deviations of Stocks A and B are E(RA) = .11, E(RB) = .13, σA = .47, and σB = .81. a.Calculate the expected return and standard deviation of a portfolio that is composed of 40 percent A and 60 percent B when the correlation between the returns on A and B is .5. b.Calculate the standard deviation of a portfolio with the same portfolio weights as in part (a) when the correlation...
Here are returns and standard deviations for four investments. Return (%) Standard Deviation (%) Treasury bills...
Here are returns and standard deviations for four investments. Return (%) Standard Deviation (%) Treasury bills 5.0 0 Stock P 11.5 16 Stock Q 14.5 28 Stock R 24.0 27 Calculate the standard deviations of the following portfolios. a. 50% in Treasury bills, 50% in stock P. (Enter your answer as a percent rounded to 2 decimal places.) a.Standart Deviation:?% b. 50% each in Q and R, assuming the shares have: (Do not round intermediate calculations. Enter your answers as...
what is the minimum-risk (standard deviation) portfolio of AT&T and Microsoft if the correlation between the...
what is the minimum-risk (standard deviation) portfolio of AT&T and Microsoft if the correlation between the two stocks is 0? 0.5? 1? -1? what do you notice about the change in the allocations between AT&T and Microsoft as the correlation coefficient moves from -1 to 0? to 0.5? to +1? why might this be? what is the standard deviation of each these minimum-risk portfolios?
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 succintly, it is equal to the square root of the variance. So one way to calculate the standard deviation of a frequency distribution 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 87 1 85 1 84 1 83 1 82 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", "the standard deviation", "the hypothesis testing" and explain with your own words and explain with your own example.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT