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Question 1 Stocks X and Y have expected returns of 12% and 20% respectively. Their return standard deviations are 25% and 40%. (a) If the
Question 1 Stocks X and Y have expected returns of 12% and 20% respectively. Their return standard deviations are 25% and 40%. (a) If the stocks' returns are uncorrelated, work out the mean return and the return standard deviation on a portfolio which places weight 1/3 on X and 2/3 on Y. (b) Using the same weights, work out the portfolio risk and return under the assumption that: i. The returns have perfect positive correlation. ii. The returns have perfect negative correlation. (c) Use your preceding answers to illustrate the effects of diversification on portfolio risk
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