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

Question

Business

Smokey

22 August, 10:09

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)

Know the Answer?

Moshe Petty · Answer 1

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