Price changes on two gold-mining stocks have shown strong positive correlation. Their historical relationship is Changes in

Question:

Price changes on two gold-mining stocks have shown strong positive correlation. Their historical relationship is Changes in B explain 60 percent of the variation of the changes A

a. Suppose you own $100,000 of A. How much of B should you sell to minimize the risk of your net position?

b. What is the hedge ratio?

c. Here is the historical relationship between stock A and gold prices: If can you lower the risk of your net position by hedging with gold (or gold futures) rather than with stock B? Explain.

Stocks
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing...