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Here are the returns on two stocks
Here are the returns on two stocks.
Digital Executive
Cheese Fruit
January +14 +7
February −3 +1
March +5 +4
April +7 +13
May −4 +2
June +3 +5
July −2 −3
August −8 −2
Calculate the variance and standard deviation of each stock.
Which stock is riskier if held on its own?
Now calculate the returns in each month of a portfolio that invests an equal amount each month in the two stocks.
Is the variance more or less than halfway between the variance of the two individual stocks?
Expert Solution
Variance of digital cheese = 44.25
Standard deviation of digital cheese = 6.65
Variance of executive fruit = 23.23
Standard deviation of executive fruit = 4.82
Digital cheese is more riskier as it has higher standard deviation.
Variance of portfolio = 29.03
Standard deviation of portfolio = 5.39
The variance is less than halfway between the variance of the two individual stocks (((44.25+23.23)/2)=33.74).
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