You have a portfolio of 4 stocks with equal shares invested in each stock. Variancesof individual stocks are the same and equal to σ2=16. Correlations between each pair of stocks isrho.a) What would be the covariances between each pair of stocks as function of rho.b) Find the variance of equally-portfolio of these 4 stocks (again as a function of rho)c) What happens to the variance of your portfolio when rho increases.d) What would be the variance of your portfolio when rho = 1. Would it be larger or smallerthan the variance of individual stocks σ2 = 16?

You have a portfolio of 4 stocks with equal shares invested in each stock. Variancesof individual stocks are the same and equal to σ2=16. Correlations between each pair of stocks isrho.a) What would be the covariances between each pair of stocks as function of rho.b) Find the variance of equally-portfolio of these 4 stocks (again as a function of rho)c) What happens to the variance of your portfolio when rho increases.d) What would be the variance of your portfolio when rho = 1. Would it be larger or smallerthan the variance of individual stocks σ2 = 16?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 6P

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