What is the correlation between the two stocks

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Your portfolio has had a variance of 25% over the past few years. The portfolio is an equally value-weighted portfolio of two stocks (X and Y). The expected return on the market is 15% and the risk free rate is 7%. The covariance of stock X and the market is 22% and covariance of stock Y and the market is 15%. The variance of the market is 15%. The covariance between the two stocks has been 20%. However, stock X is much riskier than stock Y and has a variance twice that of stock Y.

Required:

Problem a) What is the variance of each stock?

Problem b) What is the correlation between the two stocks? Interpret the result.

Problem c) Is the portfolio efficient? Explain in detail.

Reference no: EM132755603

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