Question
Suppose an investor can invest in two stocks, whose returns are random variables X and Y , respectively. Both are assumed to have the same
Suppose an investor can invest in two stocks, whose returns are random variables X and Y , respectively. Both are assumed to have the same mean returns E(X) = E(Y ) = ; and they both have the same variance V ar(X) = V ar(Y ) = 2. The correlation between X and Y is some value .
The investor is considering two investment portfolios: (1) Purchase 5 shares of the first stock (each with return X) and 1 of the second (each with return Y ). (2) Purchase 3 shares of the first stock (each with return X) and 3 of the second (each with return Y ).
Assuming that the investor prefers higher mean and lower variance of the total return on the portfolio, for which values of , 2, and would the investor prefer plan 2 to plan 1?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started