Doubt regarding Quant question

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Joined: Tue Dec 18, 2012 10:57 pm

Doubt regarding Quant question

Postby bhavyamital » Tue Dec 18, 2012 10:59 pm

Mital Tiene’s investment portfolio currently consists of stocks in two companies, 40% in Drysdahl Banking and the remaining amount in Clampett Oil. Performance measurement information for these two stocks is given in the table below:

Stock Expected Return Standard Deviation

Drysdahl Banking 10.50% 8.5%

Clampett Oil 16.55% 25.0%

The covariance between the two stocks is 0.001. Tiene is considering adding a third stock, Hilbilee Investors. Hilbilee Investor’s correlation coefficient with the current portfolio is 0.38.

Which of the following statements is least accurate?

A) As Tiene diversifies, he will reduce the portfolio's unsystematic risk.

B) With Hilbilee added to the portfolio, the variance could be 0.026.

C) The standard deviation of returns for the current portfolio is 15.5%.

Can somebody plz explain all three choices and which one is correct

Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Doubt regarding Quant question

Postby content.pristine » Thu Dec 27, 2012 1:54 pm

Hi Bhavya,

Have you had your Portfolio Management classes yet?
This question is a quants application in portfolio management.
Once you study Portfolio Management, this question should be clear.
Do let me know whether this is the case.


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