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Chloe plans to invest some of her savings into two blue-chip stocks, namely Stock A and...

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Statistics

  1. Chloe plans to invest some of her savings into two blue-chipstocks, namely Stock A and Stock B. Suppose that the mean andstandard deviation of the annual return of Stock A are 5% and 5%,respectively, and the mean and standard deviation for the annualreturn of Stock B are 10% and 10%, respectively. In this investmentportfolio, Chloe will put 50% of her money into Stock A and 50% ofher money into Stock B.

    1. (i) [3 marks] If the correlation coefficient of the two stockreturns is -0.2, do you think that this investment portfolio canachieve diversification? (for this one, i think corr is theindicator of diversification, in this question, Corr=-0.2<0,which means achieve diversification. But the answer gives:\"V[R]=26.25, cannot achieve portfolio diversification\". pleasehelp, thx!

    2. (ii) [1 bonus mark] In order to achieve portfoliodiversification, what advice will you give Chloe?

Answer & Explanation Solved by verified expert
4.0 Ratings (780 Votes)
Stock AStock BX0505mean510SD510CorrAB02i 3 marks If    See Answer
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