1. The variance for Steady Corp’s stock is 3.6%; the variance for Techie Corp’s 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?
4.5%
10.2%
9%
8.3%
2. How would your answer to the last question change if the correlation coefficient increases?
Variance of the portfolio increases as the correlation between the stocks increases, which means a larger degree of diversification.
Variance of the portfolio increases as the correlation between the stocks declines, which means a larger degree of diversification.
Variance of the portfolio increases as the correlation between the stocks increases, which means less diversification.
Variance of the portfolio increases as the correlation between the stocks declines, which means less diversification.