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Assume the standard deviation of the return on every stock is 40%, and the correlation coefficient between any two stocks is 0.2. The market
Assume the standard deviation of the return on every stock is 40%, and the correlation coefficient between any two stocks is 0.2. The market is perfect and short-selling is not restricted. As for expected rates of return, no information is available. Answer the following questions. 1 (1a) P and Q are equally weighted portfolios. P is made of two stocks while Q is made of three stocks arbitrarily chosen from the market. They, however, do not include the same stocks. Compute the standard deviations of rate of return of P and Q, respectively. (1b) Calculate the covariance and the correlation coefficient between rates of return on P Q. [Hint: use distributive property of covariance] (1c) Calculate the standard deviation of the rate of return for the equally weighted portfolio of ten stocks.
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