Assume that your uncle holds just one stock, East Coast Bank (ECB), which he thi
ID: 1101859 • Letter: A
Question
Assume that your uncle holds just one stock, East Coast Bank (ECB), which he thinks has very little risk. You agree that the stock is relatively safe, but you want to demonstrate that his risk would be even lower if he were more diversified. You obtain the following returns data for West Coast Bank (WCB). Both banks have had less variability than most other stocks over the past 5 years. Measured by the standard deviation of returns, by how much would your uncle's risk have been reduced if he had held a portfolio consisting of 60% in ECB and the remainder in WCB? (Hint: Use the sample standard deviation formula.)
Explanation / Answer
sample standard deviation of ECB= 22.64%
sample standard deviation of WCB= 22.64%
There is something wrong with the question since both the s.d are same, their weighted S.D will also be same, and hence there will not be a difference in the risk.