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Two companies have stock for which the expected returns and return standard deviations are forecast as: Company A B Expected Return. 0.20. 0.20 Standard Deviation.
Two companies have stock for which the expected returns and return standard deviations are forecast as:
Company A B
Expected Return. 0.20. 0.20
Standard Deviation. 0.30. 0.30
Consider a portfolio made up of 60% in asset A and 40% in asset B.
a. What is the expected return on the portfolio?
b. Assume that the correlation between the returns of assets A and B is 0. Since the two stocks’ expected returns and standard deviations are the same, does it make any sense to combine them in a portfolio, or would you be just as well of holding either one of the stocks separately? Explain with math.
Company A B
Expected Return. 0.20. 0.20
Standard Deviation. 0.30. 0.30
Consider a portfolio made up of 60% in asset A and 40% in asset B.
a. What is the expected return on the portfolio?
b. Assume that the correlation between the returns of assets A and B is 0. Since the two stocks’ expected returns and standard deviations are the same, does it make any sense to combine them in a portfolio, or would you be just as well of holding either one of the stocks separately? Explain with math.
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a To calculate the expected return of the portfolio we need to use the weights of each asset a...
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Corporate Finance
Authors: Jonathan Berk and Peter DeMarzo
3rd edition
978-0132992473, 132992477, 978-0133097894
