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4. An investor is considering to buy two stocks X and Y. The rate of return on X is distributed normally as x=N (10%, 9%)

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4. An investor is considering to buy two stocks X and Y. The rate of return on X is distributed normally as x=N (10%, 9%) and the rate of return on Y distributed normally as y=N (10%, 16%). Demonstrate the advantage of portfolio diversification assuming that the variance of the diversified portfolio (that has both stocks X and Y) is V = 6.26 + 6p where p is the correlation between x and y. Calculate the maximum value of p beyond which portfolio diversification is not helpful. Invest only on A: E(Return) = 10% Variance(Return) = 9% Invest only on B: E(Return) = 10% Variance(Return) = 16% Invest on A&B: E(Return) = 10% Variance(Return) = V = 6.26 + 6p If = -1 If p = 0 If = 1 V=0.26% 9% Critical value of

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