Problem

Here are returns and standard deviations for four investments.  ReturnStandardDeviatio...

Here are returns and standard deviations for four investments.

 

Return

Standard

Deviation

Treasury bills

6 %

0%

Stock P

10

14

Stock Q

14.5

28

Stock R

21

26

Calculate the standard deviations of the following portfolios.

a. 50% in Treasury bills, 50% in stock P.


b. 50% each in Q and R, assuming the shares have

 •  perfect positive correlation

 • perfect negative correlation

 • no correlation


c. Plot a figure like Figure 8.3 for Q and R, assuming a correlation coefficient of .5.


d. Stock Q has a lower return than R but a higher standard deviation. Does that mean that Q’ price is too high or that R’s price is too low?

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Solutions For Problems in Chapter 8