(d) Determine coefficient of correlation of Stocks R and S. (b) What is the standard deviation of each stock?
(a) What is the Expected Return on a portfolio made up of 40% R and 60% S? Is there any advantage of holding some of Y and some of Z? Why? Stocks Y and Z display the following parameters: (b) What would be the least risky combination if the correlation of the returns of the two securities is (i) -1.0, (ii) 0, (iii) 0.8, (iv) 1.0 (a) Calculate risk from the coefficient of correlation given below with proportion of. The formula includes the standard deviation. The following formula has been given by Harry Markowitz for a two security portfolio. It is the right kind of security which brings the maximum results. According to his research study, a low correlation level between securities in the portfolio will show less risk.Īccording to him, investing in a large number of securities is not the right method of investment. Markowitz has been able to show that securities which have less than positive correlation will reduce risk without, in any way, bringing the return down. According to him, the security with covariance which is either negative or low amongst themselves is the best manner to reduce risk. Markowitz has shown the effect of diversification by reading the risk of securities. When correlation coefficient is -1 the portfolio risk will be minimum. When the correlation is zero, an investor can expect deduction of risk by diversifying between two assets. If the coefficient correlation is zero, then it means that the return on securities is independent of one another.