Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

5. Diversification reduces the overall risk of a portfolio because of a factor called correlation. Explain how a stock with a return standard deviation of

5. Diversification reduces the overall risk of a portfolio because of a factor called correlation. Explain how a stock with a return standard deviation of 20% can be combined with a stock with a return standard deviation of 13.2% and result in a portfolio whose return standard deviation is much lower than the standard deviations of the two individual stocks? What is it about the correlation coefficient between stocks which reduces portfolio risk?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

More Books

Students also viewed these Finance questions

Question

b. Is the government supportive of the economic changes occurring?

Answered: 1 week ago