Use the Table for the Question(s) Below

question 14

Essay

Use the table for the question(s) below.
Consider the following expected returns, volatilities, and correlations:

-What diversification, if any, is achieved if two stocks in a portfolio are perfectly positively correlated?

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Definitions:

Exercise Price

The cost at which an option's possessor has the right to acquire (if it's a call option) or divest (if it's a put option) the asset underlying the option.

Call Option

A financial contract that gives the buyer the right, but not the obligation, to buy a specified quantity of an asset at a predetermined price within a specified time frame.

Delta

A measure of how much the price of an option is expected to change based on a $1 change in the underlying asset.

Convertible Bonds

Bonds that can be converted into a predefined amount of the issuing company's equity at certain times during their life, usually at the discretion of the bondholder.