Question

In: Finance

Assume you have invested $55,000 in the stock of ABC Industries and $20,000 in the stock...

Assume you have invested $55,000 in the stock of ABC Industries and $20,000 in the stock of Southern Enterprises. Their prospective returns are listed below:

State of the Economy

Probability

ABC Industries

Southern Enterprises

Expansion

25%

30%

25%

Normal

50%

21%

15%

Recession

25%

2%

-4%

  1. Determine the expected return for ABC Industries and Southern Enterprises.
  2. Determine the expected return of the portfolio.
  3. Determine the standard deviation of the portfolio.
  4. In general, what is the correlation of the two stocks (i.e, positive or negative)? What is their general correlation with the state of the economy?

Solutions

Expert Solution

Solution :- (C)

Variance of Portfolio =

= (0.733*10.21)2 + (0.267*10.50)2 + 2*0.733*0.267*10.21*10.50*1

= 105.83

Std deviation = (105.83)1/2 = 10.29%

(D) Correlation between there two stock is Positive and that is Positive 1.

If there is any doubt please ask in comments


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