Question
4. Assume that your uncle holds just one stock, East Coast Bank (ECB), which he thinks has very little risk. You agree that the stock
4. Assume that your uncle holds just one stock, East Coast Bank (ECB), which he thinks has very little risk. You agree that the stock is relatively safe, but you want to demonstrate that his risk would be even lower if he were more diversified. You obtain the following returns data for West Coast Bank (WCB). Both banks have had less variability than most other stocks over the past 5 years. Measured by the standard deviation of returns, by how much would your uncles risk have been reduced if he had held a portfolio consisting of 47% in ECB and the remainder in WCB? Based on coefficient of correlation, how diversified were the investments? How might the fact that both assets were banks affect diversification? Year ECB WCB 2014 10.00% 15.00% 2015 30.00% -5.00% 2016 -5.00% 10.00% 2017 15.00% 30.00% 2018 13.00 7.00%
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