Consider the characteristics of the following three stocks: T& Company, Expected
ID: 2716093 • Letter: C
Question
Consider the characteristics of the following three stocks: T& Company, Expected Return = 18%; Standard Deviation = 25% A& Company, Expected Return = 12%; Standard Deviation = 18% S& Company, Expected Return = 11%; Standard Deviation = 15% The correlation between T& Company and A& Company is -0.2. The correlation between T& Company and S& Company is -0.21. The correlation between A& Company and S& Company is 0.95. If you can pick only two stocks for your portfolio, which would you pick? Why?
Explanation / Answer
Combining either stock with T & co. has good potential because it has higher expected return and they have negative correlation. T & co. and A & co. has high expected return and standard deviation. There correlation is very low, therefore risk will be reduced when combined. Therefore, if we have to pick only two stocks. then they will be T & co. and A & co.