The variance for Corp 1 stock is 3.6%; the variance for Corp 2 stock is 14.4%.

| July 14, 2018

The variance for Corp 1 stock is 3.6%; the variance for Corp 2 stock is 14.4%. What’s the variance for a portfolio of (25%, 75%) of these two stocks, if the correlation coefficient between the two stocks’ returns is 0?I believe the variance for the portfolio is 0.083, however I need help with the following question.How would your answer to the last question change if the correlation coefficient changes?1) Variance of the portfolio increases as the correlation between the stock returns increases, which means less diversification.2) Variance of the portfolio increases as the correlation between the stock returns increases, which means a larger degree of diversification.3) Variance of the portfolio increases as the correlation between the stock returns declines, which means a larger degree of diversification.4) Variance of the portfolio increases as the correlation between the stock returns declines, which means less diversification.

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