Elizabeth has decided to form a portfolio by putting 30% of her money into stock 1 and 70% into stock 2. She assumes that the expected returns will be 10% and 18%, respectively, and that the standard deviations will be 15% and 24%, respectively. Describe what happens to the standard deviation of the portfolio returns when the coefficient of correlation ρ decreases.
Elizabeth has decided to form a portfolio by putting 30% of her money into stock 1 and 70% into stock 2. She assumes that the expected returns will be 10% and 18%, respectively, and that the standard deviations will be 15% and 24%, respectively.
Describe what happens to the standard deviation of the portfolio returns when the coefficient of correlation ρ decreases.
The standard deviation of the portfolio returns decreases as the coefficient of correlation decreases. |
The standard deviation of the portfolio returns increases as the coefficient of correlation increases. |
The standard deviation of the portfolio returns decreases as the coefficient of correlation increases. |
The standard deviation of the portfolio returns increases as the coefficient of correlation decreases. |
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 3 images