Assume that your uncle holds just one stock, East Coast Bank (ECB), which he thinks...
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Assume that your uncle holds just one stock, East Coast Bank (ECB), which he thinks bas very little risk. You agree that the stock is relatively safe, but you want to demonstrate that his risk would be even lower if he were more diversified. You obtain the following returns data for West Coast Bank (WCB). Both banks have had less variability than most other stocks over the past years. Measured by the standard deviation of return, by how much would your uncle's risk have been reduced if he had held a portfolio consisting of 27% in ECB and the remainder in WCB? (Hint: Use the sample standard deviation formala) Do not round your intermediate calculations Year ECH WCB 1 40.00% 40.00% 2 -10.00% 12.00% 27.00 -5.00% -5.00% 10.00% 12.00 27.00 3 5 Average return Standard deviation 303 12.80 21.09 12.80% 21.09 4160D 6217pa 0 0.3.39 104
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