The following correlation matrix is for three stocks: A, B, and C. Stock A Stock

Question

The following correlation matrix is for three stocks: A, B, and C.

Stock A

Stock B

Stock C

Stock A

1.0000

0.4850

0.4407

Stock B

0.4850

1.0000

0.7004

Stock C

0.4407

0.7004

1.0000

1- Consider that correlation matrix is for three stocks: A, B, and C. Which combination of two stocks gives you the best chance of minimizing non-systematic risk?

2- Again, consider that correlation matrix for the three stocks: A, B, and C. Which combination of two stocks gives you the best chance of minimizing systematic risk?

3- Consider againthat correlation matrix. Suppose you form a portfolio consisting of Stocks B and C. What proportion of your funds should be invested in Stock C in order to minimize the risk of the portfolio?

Stock A

Stock B

Stock C

Stock A

1.0000

0.4850

0.4407

Stock B

0.4850

1.0000

0.7004

Stock C

0.4407

0.7004

1.0000

Explanation / Answer

The following correlation matrix is for three stocks: A, B, and C. Stock A Stock

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