3. The correlation coefficients between pairs of stocks are as follows: Corr(W,X)=0.40, Corr(W,Y)=0.60, Corr(W,Z)=0.80. Each of the stocks W, X, Y, Z has an expected return of 10% and a standard deviation of 25%. If your entire portfolio consists of Stock W, and you can add a bit of only one stock to your portfolio (from X, Y, and Z), which would you choose? Back up your answer with numbers. Suppose that in addition to investing in one more stock, you can also invest in T-bills. Would that change the answer to the above question (which of X, Y, and Z to add to your risky stock W) if the T-bill rate were 8%? Explain why or why not. If the T-bill rate were 10%, what would your optimal portfolio be?
3. The correlation coefficients between pairs of stocks are as follows: Corr(W,X)=0.40, Corr(W,Y)=0.60, Corr(W,Z)=0.80. Each of the stocks W, X, Y, Z has an expected return of 10% and a standard deviation of 25%. If your entire portfolio consists of Stock W, and you can add a bit of only one stock to your portfolio (from X, Y, and Z), which would you choose? Back up your answer with numbers. Suppose that in addition to investing in one more stock, you can also invest in T-bills. Would that change the answer to the above question (which of X, Y, and Z to add to your risky stock W) if the T-bill rate were 8%? Explain why or why not. If the T-bill rate were 10%, what would your optimal portfolio be?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:3. The correlation coefficients between pairs of stocks are as follows: Corr(W,X)=0.40,
Corr(W,Y)=0.60, Corr(W,Z)=0.80. Each of the stocks W, X, Y, Z has an expected return of 10%
and a standard deviation of 25%.
If your entire portfolio consists of Stock W, and you can add a bit of only one stock to your
portfolio (from X, Y, and Z), which would you choose? Back up your answer with numbers.
Suppose that in addition to investing in one more stock, you can also invest in T-bills. Would
that change the answer to the above question (which of X, Y, and Z to add to your risky stock W)
if the T-bill rate were 8%? Explain why or why not. If the T-bill rate were 10%, what would your
optimal portfolio be?
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