Question
In class we did an example involving diversifying a portfolio. We said that the reason this is done is to minimize risk by reducing the
In class we did an example involving diversifying a portfolio. We said that the reason this is done is to minimize risk by reducing the variance/standard deviation. Here's a real life example. Since 1997, the average return on the S&P 500 is roughly 7.5%. The average return on the bond market is roughly 4.3%. The standard deviation on the S&P 500 returns is roughly 20% and the standard deviation on the bond market returns is roughly 4%. Also, the correlation between stock and bond returns in this period is roughly -0.2. Find the mean and standard deviation of the return of a portfolio that invests 70% into S&P 500 stocks and 30% into bonds.
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