You are risk averse. You are deciding between two portfolios that are made up of Stock Alpha and Stock Gamma. Portfolio 1, consisting of 80% of Stock Alpha and 20% of Stock Gamma has an expected return of 14.2% and a standard deviation of return of 13.3%. Portfolio 2, consisting of 60% of Stock Alpha and 40% of Stock Gamma has an expected return of 15.4%. If Stock Alpha has a standard deviation of return of 25%, Stock Gamma has a standard deviation of return of 40%, and the correlation coefficient between the two stocks’ returns is â€0.90, do you prefer Portfolio 1 or Portfolio 2? Show your work and write a very brief explanation for your preference.
The question belongs to Finance and it discusses about choosing a particular portfolio for investment.
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