Statistics for three stocks, A, B and C, are shown in the following tables: Stan

Question

Statistics for three stocks, A, B and C, are shown in the following tables:

Standard Deviation of Returns

Stock

A

B

C

Standard Deviation (%)

40

20

40

Correlations of Returns

Stock

A

B

C

A
B
C

1
0
0

0.90
1
0

0.50
0.10
1.00

Only on the basis of the information provided in the tables, and given a choice between a portfolio made up of equal amounts of stocks A and B or a portfolio made up of equal amounts of stocks B and C, which portfolio would you recommend? Show calculations and Justify your choice.

Standard Deviation of Returns

Stock

A

B

C

Standard Deviation (%)

40

20

40

Correlations of Returns

Stock

A

B

C

A
B
C

1
0
0

0.90
1
0

0.50
0.10
1.00

Explanation / Answer

B portfolio is correct answer

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