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Julie is an investor who believes that past variability of stocks is a reasonably good estimate of future risk associated with the stocks. Julie works
Julie is an investor who believes that past variability of stocks is a reasonably good estimate of future risk associated with the stocks. Julie works on creating a new portfolio and has already purchased stock A. Now she considers two other stocks, B and C. Julie collected data on the historic rates of return for all three stocks, which are presented in the following table. Year 2014 2015 Stock A Stock B 20% -5% Stock C 5% -5% 5% -5% 2016 5% -10% 20% -10% 20% -10% 2017 Average return Estimated standard deviation 2.5 2.5 2.5 13.23 13.23 13.23 Suppose Julie can only afford to complement stock A by adding just one of the two other stocks, either stock B or stock C. Complete the following table by computing correlation coefficients between stocks A and B and between stocks A and C, and calculate average returns and standard deviation for the two potential portfolios, AB and AC: Stocks A and B Stocks A and C Correlation coefficient Average return Standard deviation
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