FINANCE-Campbell’s father holds just one stock, East Coast Bank (ECB)

QUESTION

25. Campbell’s father holds just one stock, East Coast Bank (ECB), which he thinks is a very low-risk security. Campbell agrees that the stock is relatively safe, but he wants to demonstrate that his father’s risk would be even lower if he were more diversified. Campbell obtained the following returns data shown for West Coast Bank (WCB). Both have had less variability than most other stocks over the past 5 years. Measured by the standard deviation of returns, by how much would his father’s historical risk have been reduced if he had held a portfolio consisting of 60% ECB and the remainder in WCB?YearECBWCB201020.00%25.00%2011-10.00%15.00%201235.00%-5.00%2013-5.00%-10.00%201415.00%35.00%

ANSWER:

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