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23 February, 06:41

Consider two stocks X and Y with the following expected returns (in percent) and standard deviations. How much of your $10,000 total investment should you invest in stock Y if you would like a portfolio with zero risk and the correlation between the two stocks is - 1 (perfectly negatively correlated) ?

Stock Expected return Standard deviation

X 10 75

Y 20 50

+5
Answers (1)
  1. 23 February, 07:00
    0
    X $4000

    Y $6000

    Explanation:

    Let w be invested in Stock X,

    Correlation = - 1

    Standard Deviation = w (0.75) - (10,000 - w) (0.50)

    So,

    For standard Deviation to be 0,

    0 = 0.75w - 5,000 + 0.50w

    w = $4,000

    Amount invested in Stock X = $4,000

    Amount invested in Stock Y = $6,000
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