Allison is an investor who believes that past variability of stocks is a reasonably good estimate of future risk associated with the stocks. Allison works on creating a new portfolio and has already purchased stock A. Now she considers two other stocks, B and C. Allison collected data on the historic rates of return for all three stocks, which are presented in the following table. Complete the table by calculating standard deviations for each stock: Year Stock C Stock A 20% Stock B -5% 2014 5% 2015 -5% 5% -5% 2016 5% -10% 2096 2017 -10% 2096 -10% Average return Estimated standard deviation Suppose Allison can only afford to complement stock A by adding just one of the two other stocks, either stock B or stock C. Complete the following table by computing correlation coefficients between stocks A and B and between stocks A and C, and calculate average returns and standard deviation for the two potential portfolios, AB and AC: Ch 02: Assignment - Risk and Return: Part 1 Suppose Allison can only afford to complement stock A by adding just one of the two other stocks, either stock B or stock C. Complete the following table by computing correlation coefficients between stocks A and B and between stocks A and C, and calculate average returns and standard deviation for the two potential portfolios, AB and AC: Stocks A and B Stocks A and C Correlation coefficient Average return Standard deviation Suppose Allson has to choose between two portfolios, AB and Ac. Allison will be better off choosing Which of the following statements about portfolio diversifications are correct? Check all that apply. Returns on stocks in the same industry are more closely correlated than on stocks in different industries. Diversification can reduce risk but not eliminate it. Portfolios that include stocks of only big companies minimize risk. Correlation between returns on stocks of small companies is smaller than returns on stocks of big companies. dll Stocks A and B Stocks A and C Correlation coefficient Average return Standard deviation Suppose Allison has to choose between two portfolios, AB and AC. Allison will be better off choosing Which of the following statements about portfolio diversifications are correct? Check all that apply. Returns on stocks in the same industry are more closely correlated than on stocks in different industries. Diversification can reduce risk but not eliminate it. Portfolios that include stocks of only big companies minimize risk. Correlation between returns on stocks of small companies is smaller than returns on stocks of big companies
