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In: Finance

Suppose that your friend, Angela, holds a single stock, Early Riser Bank (ERB), which she believes...

Suppose that your friend, Angela, holds a single stock, Early Riser Bank (ERB), which she believes faces little risk. Despite the fact that you agree with Angela on the riskiness of the firm, you set out to show her that her risk would be even lower if she was more diversified. As a demonstration exercise, you find the following returns data for Late Riser Bank (LRB). Using the standard deviation of returns, by how much would Angela's risk have been reduced if she had held a 60/40 portfolio ( 60% in ERB and the remainder in LRB)?  

   Year               ERB        LRB  

  •                 2008             40.00% 40.00%
  •                 2009            -10.00%        15.00%
  •                 2010             35.00%        -5.00%
  •                 2011             -5.00%       -10.00%
  •                 2012             15.00%        35.00%

Average return = 15.00%        15.00%

Standard deviation = 22.64%        22.64%

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jeff jeffy answered 1 year ago
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