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 Qhas a lower return than R but a higher standard deviation. Does that mean that Q’s price is too high or that R’s price is too low?
Figure 8.3
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