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A portfolio is composed of two stocks, A and B. Stock A has a standard deviation...

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 20%, while stock B has a standard deviation of return of 26%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .035, the correlation coefficient between the returns on A and B is _________.

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Answer #1

Variance of Portfolio = wa2sa2 + wb2sb2 + 2wawbsasb.Correlation

0.035 = (0.60)2(0.20)2 + (0.40)2(0.26)2 + 2(0.60)(0.40)(0.20)(0.26)(Correlation)

Correlation = 0.40

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