Homework Answers
Answer: STOCK Z
The reason is that a stock with a negative correlation provides
the highest diversification benefits beacuse of the offsetting
effect that they adds on to the portfolio's returns. In a simple
terms, a negative correlation stocks in a portfolio helps the one
stock's negative return to get offsetted by a positive return of
the other stock . This happens because both the stocks moves in the
opposite direction with respect to the market movement, when the
correlation is negative.
Therefore, due to a negative correlation, STOCK Z will provide highest diversification benefit.
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2. 3: Risk and Rates of Return: Risk in Portfolio Context Risk
and Rates of Return: Risk in Portfolio Context The capital asset
pricing model (CAPM) explains how risk should be considered when
stocks and other assets are held . The CAPM states that any stock's
required rate of return is the risk-free rate of return plus a risk
premium that reflects only the risk remaining diversification. Most
individuals hold stocks in portfolios. The risk of a stock held in...
The following table provides the expected return and the
standard deviation of returns for srocks and gold. Your client is
currently holding a portfolio of stocks and he is considering
whether he should replace half of the stocks with gold.
.
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