Question

The standard deviation of annual returns for Stock Y is 44%.  The standard deviation of annual returns...

The standard deviation of annual returns for Stock Y is 44%.  The standard deviation of annual returns for Stock Z is 74%. The correlation between the two stocks' returns is +1. If you decide to buy $4400 worth of Stock Z, figure out how much of Stock Y you need to buy or sell in order to create a net-short hedge portfolio. Then, for your answer, type the initial value of the portfolio. Since the portfolio is net-short, type your answer as a negative number.

0 0
Add a comment Improve this question Transcribed image text
Answer #1

Given,

Standard deviation of stock Y SD(Y) = 44%

Standard deviation of stock Z SD(Z) = 74%

Correlation between stock Y and Z Corr(Y,Z) = 1

money invested in stock Z = $4400

Let weight of Y be w then weight of stock Z in portfolio is (1-w)

Standard deviation of a portfolio with correlation 1 is w1*SD1 + w2*SD2

So here Standard deviation of portfolio = w*0.44 + (1-w)*0.74

Since required net short hedge portfolio, so standard deviation of portfolio = 0

So, w*0.44 + (1-w)*0.74 = 0 => w = 0.74/0.3 = 2.4667

weight of Z = (1-w) = -1.4667

let amount of stock Y = Y

So, weight of Y is Y/(Y+4400) = 2.4667

So, Y = -7400

So a total of $7400 stock Y must be short.

So answer is -7400

Add a comment
Know the answer?
Add Answer to:
The standard deviation of annual returns for Stock Y is 44%.  The standard deviation of annual returns...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT