Question
State Probability Return: Stock 1 Return: Stock2 Bear .25 -.020 .034 Normal .60 .138 .062 Bull .15 .218 .092 a.) Calculate the covariance of return
| State | Probability | Return: Stock 1 | Return: Stock2 |
| Bear | .25 | -.020 | .034 |
| Normal | .60 | .138 | .062 |
| Bull | .15 | .218 | .092 |
a.) Calculate the covariance of return between Stock 1 and Stock 2.
b.) Calculate the correlation of return between Stock 1 and Stock 2.
c.) If you combine Stock 1 and Stock 2 into a portfolio, will you obtain diversification benefits? Why, or why not (be sure to provide quantitative justification for your answer)?
d.) What is the variance of return for a portfolio that invests 40% of wealth in Stock 1 and 60% in Stock 2.
Please use formulas and careful reasoning!
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ISE Foundations Of Financial Management
Authors: Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
18th International Edition
1265074658, 9781265074654
