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The table below shows the mean returns and standard deviations of returns of four stocks Stock A Stock B Stock C Stock D E(R) 10%
- The table below shows the mean returns and standard deviations of returns of four stocks
| Stock A | Stock B | Stock C | Stock D |
E(R) | 10% | 30% | 30% | 30% |
Std. Dev.(R) | 5% | 25% | 25% | 25% |
The correlations between stock A and the other three stocks are given below:
| Stock B | Stock C | Stock D |
Correlation coefficient of Stock A with: | 0 | 1 | -1 |
(20 marks in total)
- Compare the portfolio mean and standard deviation between three alternative portfolios:
- Portfolio AB with 70% in stock A and 30% in stock B
- Portfolio AC with 70% in stock A and 30% in stock C
- Portfolio AD with 70% in stock A and 30% in stock D
(12 marks)
- Sketch out the efficiency frontiers for the three combinations of: i) stock A & stock B; ii) stock A & stock C; iii) stock A & stock D. Identify the points i), ii), and iii) on the efficiency frontiers.
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