FoundationMultiple choice
Two stocks and a worst-of · Part 1 of 3
Two stocks each trade at $100 with 30% volatility. A one-year worst-of call pays the larger of zero and the worse-performing stock’s return. The correlation between the stocks is 0.5.
First, a warm-up: what is the volatility of an equally weighted basket of the two stocks?
- A30%, the same as each stock
- BAbout 21%, dividing by √2 for two assets
- CAbout 26%
- D15%, half of each stock’s volatility
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