You have $10,000 to invest. You decide to invest $20,000 in Google and short sell $10,000 worth of Yahoo!. Google's expected return is 15% with a volatility of 30% and Yahoo!'s expected return is 12% with a volatility of 25%. The stocks have a correlation of 0.9. What is the expected rate of return and volatility of the portfolio?
The volatility of a portfolio is determined not only by the volatility of individual assets, but also by the correlation between asset returns. As more and more assets are included, the latter becomes increasingly more important.
Answer and Explanation:
The weight of your portfolio is 2 for the Google stock, and -1 for the Yahoo stock. The negative sign for the Yahoo stock indicates a short position...
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fromChapter 12 / Lesson 1
A portfolio can be designed in several different ways. It is important to understand the basics of a portfolio before building and managing one. In this lesson, we will go over the weight, return, and variance of a portfolio.