Question
Consider the following information for three stocks, Stock A, Stock B, and Stock C. The returns on each of the three stocks are positively correlated,
Consider the following information for three stocks, Stock A, Stock B, and Stock C. The returns on each of the three stocks are positively correlated, but they are not perfectly correlated. (That is, all of the correlation coefficients are between 0 and 1.) Stock Expected Return Standard Deviation Beta Stock A 10% 20% 1.0 Stock B 10% 20% 1.0 Stock C 12% 20% 1.4 Portfolio P has half of its funds invested in Stock A and half invested in Stock B. Portfolio Q has one third of its funds invested in each of the three stocks. The risk-free rate is 5 percent, and the market is in equilibrium. (That is, required returns equal expected returns.)
Required: 1. Compute for the Coefficient of Variation of Stock A, B, and C. Rank the investments from least to the riskiest using Coefficient of Variation 2. If the investor is risk averse, which investment will you recommend? 3. Compute for the Beta of Portfolio P and Portfolio Q. Which portfolio is riskier?
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