ef E lio 20% 30% 35% 15% Return 6.00% 14.00% 11.00% 5.00% Deviation 33.00% 37.00
ID: 2618210 • Letter: E
Question
ef E lio 20% 30% 35% 15% Return 6.00% 14.00% 11.00% 5.00% Deviation 33.00% 37.00% 40.00% 42.00% Inc. Babish & Co. Comell Industries What is the expected return on Andre's stock portfolio? ? 15.00% ? 13.50% ? 10.00% o 7.50% Suppose each stock in Andre's portfolio has a correlation coefficient of 0.40 (p- 0.40) with each of the other stocks. | The market's average standard deviation is approximately 20%, and the weighted average of the risk of the |||individual securities in the partially diversified four-stock portfolio is 38% with a correlation coefficient of o.30 with the other stocks in the portfolio f 40 additional, random were added to the portfolio, what effect would this have on the ly selected stocks portfolio's standard deviation (%) O It would gradually settle at approximately 50% O It would gradually settle at approximately 20%. 0 It would decrease gradually, settling at about 0%; Oiit.vnould stay constant at 38%.Explanation / Answer
1. Expected return of andre's portfolio = Weight of stock 1* Return of stock 1 + Weight of stock 2* Return of stock 2 + Weight of stock 3* Return of stock 3 + Weight of stock 4* Return of stock 4 = 20% * 6% + 30% * 14% + 35% * 11% + 15% * 5% = 10%
Option c is correct
2. Option b is correct
because as no of stocks are increased to 40 and correlation is decreased to 0.3 the diversification will ensure that the standard deviation or risk will match the standard deviation of market at 20%.
Best of Luck. God Bless
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