1F.13
13.Consider two stocks: Nike and Boeing. Nike has an expected return of 40% this year and Boeing has one of 20%. Nike and Boeing's standard deviations are both 15%. YOU DO NOT NEED TO DO ANY CALCULATIONS FOR THIS QUESTION.
If the correlation coefficient between the two stocks is greater than 0, but less than 1, could you find a combination of the two stocks that would give you a portfolio standard deviation of less than 15%? (3 pts)
Yes, since the correlation is less than perfect, their movements will partially offset each other so that their total std deviation together will be less than either of their std deviations alone (< 15%).
If the correlation coefficient between the two stocks is -1, could you find a combination of the two stocks that would give you a portfolio standard deviation of 0? (3 pts)
Yes. Anytime two stocks have perfect negative correlation, some combination can be found that will yield an expected portfolio std deviation of exactly zero (their movements will exactly offset eachother).
Will the expected return change at all between the two scenarios? Explain. (4 pts)
Not unless your portfolio weights change. The correlation coefficient itself does not affect the expected return, but the portfolio weights do.