Question
Calculate the followings and verify the diversification effect with the data in the table assuming that with the initial endowment of $10,000, you invest $6,000
Calculate the followings and verify the diversification effect with the data in the table assuming that with the initial endowment of $10,000, you invest $6,000 in Stock A and $4,000 in Stock B. Also four states of the economy are assumed to be equally likely.
| State of the Economy | Return on Stock A | Return on Stock B | ||
| Depression | 20% | 5% | ||
| Recession | 10% | 20% | ||
| Normal | 30% | 12% | ||
| Boom | 50% | 9% | ||
Q. 7: Correlation coefficient between securities
Q. 8: Variance of a portfolio
Q. 9: Standard deviation of a portfolio
Q. 10: Compare the weighted average of standard deviations of two securities with the portfolio standard deviation. (a) Did you see diversification effect? (b) Why? Justify your answer in part (a).
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Build An Online Retail System For Under $150
Authors: Roger Butterworth
1st Edition
1530170044, 978-1530170043
