Problem 2:Consider two stocks, A and B, with their expected returns and standard deviations, as...
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Problem 2:Consider two stocks, A and B, with their expected returns and standard deviations, as follows:
A
B
expected return, k
15%
10%
standard deviation,
10
8
a. What is the expected return if the portfolio contains equal amounts (0.50) of each security?
b. What is the standard deviation for the equally weighted portfolio in (a) if the correlation between the security return is (1) Corr ab = +1.00 (2) Corr ab = +0.50, and (3) Corr ab = -0.50?
c. How does the decrease in the portfolio standard deviation (as the correlation between the security returns drops) relate to the diversifiable and nondiversifiable risk?
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