The variance for Steady Corp’s stock is 3.6%; the variance for Techie Corp’s sto
ID: 2744230 • Letter: T
Question
The variance for Steady Corp’s stock is 3.6%; the variance for Techie Corp’s stock is 14.4%. What’s the variance for a portfolio of (25%, 75%) of these two stocks, if the correlation coefficient between the two stocks’ returns is 0?
- 0.117
- 0.225
- 0.067
- 0.083 F
How would your answer to the last question change if the correlation coefficient changes?
- Variance of the portfolio increases as the correlation between the stock returns declines, which means a larger degree of diversification.
- Variance of the portfolio increases as the correlation between the stock returns increases, which means less diversification.
- Variance of the portfolio increases as the correlation between the stock returns declines, which means less diversification.
- Variance of the portfolio increases as the correlation between the stock returns increases, which means a larger degree of diversification.
Explanation / Answer
2) Variance of the portfolio increases as the correlation between the stock returns increases, which means a larger degree of diversification.
Variance Weights SD Steady Corp’s stock 3.60% 25.00% 18.97% Techie Corp’s stock 14.40% 75.00% 37.95% Variance = (w(1)^2 x o(1)^2) + (w(2)^2 x o(2)^2) + (2 x (w(1)o(1)w(2)o(2)q(1,2)) Variance = 25%^2 x 3.60% + 75%^2 x 14.40% + (1x25% x 18.97% x 75% x 37.95% x 0) 0.08325 Variance 0.08325Related Questions
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