1 answer

The information regarding a portfolio consisting of two stocks is given below. Stock A E(R). 15%...

Question:

The information regarding a portfolio consisting of two stocks is given below. Stock A E(R). 15% 17% Standard Deviation 10% 1

The information regarding a portfolio consisting of two stocks is given below. Stock A E(R). 15% 17% Standard Deviation 10% 14% Stock B The correlation coefficient between Stocks A and C is zero. It can be inferred that the standard deviation of a portfolio consisting of these two stocks - Zero. Select one: O a. can not be O b. can be

Answers

a. can not be

The correlation coefficient of stock A and Stock B is Zero which these stocks are uncorrelated. Thus, these two stock have very little diversification effect and can not reduce the portfolio risk to zero.

To reduce the portfolio risk to zero, correlation coefficient between two stock should be -1 i.e perfectly negative correlated.

Please note: I think there is typo error in correlation coefficient line, it should be "Stock A and B is zero" instead of "Stock A and C is zero". If it is not a typo error please do comment.

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.

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