Determining correlation between shares


1) The analyst has modelled the stock of the company by using a Fama-French three-factor model. Risk-free rate is 3%, market return is 11%, return on the SMB portfolio (rSMB) is 3.9%, and return on HML portfolio (rHML) is= 5.4%. If ai = 0, bi = 1.2, ci = - 0.4, and di = 1.3, what is the stock's predicted return?

Correlation between shares A and B is= 0.50, whereas the correlation between shares A and C is –0.5. You already own share A and are considering of purchasing either share B or share C. If you wish your portfolio to have lowest possible risk, would you buy share B or C? Would you expect share you select to affect return that you earn on your portfolio?

Go through the method of working out why C is the best option for portfolio?

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Finance Basics: Determining correlation between shares
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