Suppose we have stock a and stock b the returns on

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: t not tend to move together over time (they are not perfectly correlated). are rate of of return return time Suppose we have stock A and stock B. The returns on these stocks do not not tend to move together over time (they are not perfectly correlated). are kA rate of of return return time Suppose we have stock A and stock B. The returns on these stocks do not not tend to move together over time (they are not perfectly correlated). are kA rate of of return return kB time What has happened to the variability of returns for the portfolio? portfolio? kA rate of of return return kB time What has happened to the variability of returns for the portfolio? portfolio? kA rate of of return return kB time kp Diversification Diversification Investing in more than one security Investing more to reduce risk. risk If two stocks are perfectly positively If positively correlated, diversification has no correlated diversification effect on risk. effect If two stocks are perfectly negatively If negatively correlated, the portfolio is perfectly correlated the diversified. diversified. If you owned a share of every stock If traded on the NYSE and NASDAQ, would you be diversified? would YES! YES! Would you have eliminated all of Would your risk? your NO! Common stock portfol...
View Full Document

Ask a homework question - tutors are online