Stocks offer an expected rate of return of 10% with a standard deviation of 20% and gold offers an expected return of 5% with a standard deviation of 25%. In light of the apparent inferiority of gold to stocks with respect to both mean return and volatility, would anyone hold gold?

Question

Devyn

Business

14 September, 00:19

Stocks offer an expected rate of return of 10% with a standard deviation of 20% and gold offers an expected return of 5% with a standard deviation of 25%. In light of the apparent inferiority of gold to stocks with respect to both mean return and volatility, would anyone hold gold?

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Answers (1)

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Hadassah Leblanc · Answer 1

Yes

Explanation:

It is possible for an investor to be attracted to holding gold as a part of his portfolio despite that it appears stocks dominate gold.

An investor may elect to hold gold if there is a low correlation between stocks and gold. However, if the correlation between gold and stocks is high, gold will not be attractive and no investor will hold god.

Therefore, an investor will hold gold when there is a low correlation between stocks and gold.