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Consider the returns for the following stocks. Skywalker, Inc. Empire, Inc. 2015 - 5.0% 40.0% 2016 10.0 25.0 2017 15.0 15.0 2018 25.0 12.0 2019
Consider the returns for the following stocks. Skywalker, Inc. Empire, Inc. 2015 - 5.0% 40.0% 2016 10.0 25.0 2017 15.0 15.0 2018 25.0 12.0 2019 40.0 -7.0 a. Skywalker, Inc. has a variance of 2.83%. Empire, Inc. has a variance of 3%. Based on this information, if you are risk averse and had to choose just one stock, which should you buy? Why? b. Calculate the mean, variance, and standard deviation of a portfolio consisting of 50% Skywalker and 50% Empire. What's the quantitative benefit from combining these two stocks? SHOW ALL WORK! C. What is the key mechanism at work that results in the lowering of risk when assets are combined in a portfolio? NOT MORE THAN TWO WORDS
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