Question
The market has only these three stocks: A stock B stock C stock Expected return 3.5% 6% 9% Standard deviation 13% 15% 19% The correlation
The market has only these three stocks: A stock B stock C stock Expected return 3.5% 6% 9% Standard deviation 13% 15% 19% The correlation coefficient between each pair of stocks is 0.4 a. Consider an investor that can invest in only two stocks (he cannot invest in all three stocks) and is interested in a 7.5% expected return. How would you recommend constructing the investors portfolio? What would be the standard deviation of the portfolio? Consider an investor that can invest in all three shares (she doesnt have to invest in all of them), however, the weights of stock B and stock C must be equal in her portfolio. How would you recommend constructing the investors portfolio, if she is looking for an expected return of 6.3%? What would be the standard deviation of the portfolio? Suppose there was an additional stock in the market. Following the result in item c, if we add another share similar to stock A (same return, standard deviation and correlation with all the other shares), will the standard deviation change and in which direction? Explain without numerical calculation
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