Question
Assume that your cousin holds just one stock, Eastman Chemical Bonding (ECB), which he thinks has very little risk. You agree that the stock is
Assume that your cousin holds just one stock, Eastman Chemical Bonding (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 Wilder's Creations and Buildings (WCB). Both companies 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 cousin's risk have been reduced if he had held a portfolio consisting of 15% in ECB and the remainder in WCB?
| Year | ECB | WCB | |
| 2011 | 40.00% | 40.00% | |
| 2012 | -10.00% | 15.00% | |
| 2013 | 35.00% | -5.00% | |
| 2014 | -5.00% | -10.00% | |
| 2015 | 15.00% | 35.00% | |
| Average return = | 15.00% | 15.00% | |
| Standard deviation = | 22.64% | 22.64% |
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Principles of Auditing and Other Assurance Services
Authors: Ray Whittington, Kurt Pany
19th edition
978-0077804770, 78025613, 77804775, 978-0078025617
