Question
Suppose Avon and Nova stocks have volatilities of 55% and 26%, respectively, and they are perfectly negatively correlated. What portfolio of these two stocks
Suppose Avon and Nova stocks have volatilities of 55% and 26%, respectively, and they are perfectly negatively correlated. What portfolio of these two stocks has zero risk? Solution: Var(Rp) = Var(wR + wR) = wvar(R) + wvar(R) + 2ww2cov(R, R) Cov = corr x Vol VolN = 1 x 0.55 x 0.26 = -0.143 Volp = x x 0.552 + XN 0.26 + 2 XXNX-0.143 = 0 We solve for x = 1 - XA Substituting: 0.6561x -0.4212X+0.0676 = 0 x = -bb - 4ac 2a XA = 0.32; XN = 0.68 19 0.6561x-0.4212xA+0.0676 = 0
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Intermediate Financial Management
Authors: Brigham, Daves
10th Edition
978-1439051764, 1111783659, 9780324594690, 1439051763, 9781111783655, 324594690, 978-1111021573
