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WeVest Financial Advisors suggests an investment in two stocks (40% in Stock A and 60% in...

WeVest Financial Advisors suggests an investment in two stocks (40% in Stock A and 60% in Stock B). They claim the investment will reduce risk through diversification, but they need proof. This is the historical returns for the two stocks.

Year Returns (%)
Stock A Stock B
2012 14.82 % 10.76 %
2013 15.72 11.82
2014 12.61 10.43
2015 10.84 11.96
2016 11.32 7.66

a. Using a 40/60 split, what is the weighted average standard deviation of the two stocks? (Enter your answer as a percent rounded to two decimal places.)

Weighted Average Standard Deviation %

b. Recalculate the standard deviation of a portfolio of the two stocks. (Enter your answer as a percent rounded to two decimal places.)

Portfolio standard deviation %

c. What is the reduction in standard deviation that results from the creation of a portfolio of the two stocks? (Enter your answer as a percent rounded to two decimal places.)

Reduction in standard deviation %

Solutions

Expert Solution

Formulas for above values are as follows:

jeff jeffy answered 2 years ago
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