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An investor is considering to buy two stocks X and Y. The rate of return on X is distributed normally as x = N (10%,
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 - 6 where is the correlation between x and y. Calculate the maximum value of beyond which portfolio diversification is not helpful.
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