In: Finance
The price of Stock A today is 50, and stock B is 100. The
probability of a booming, normal, and recessionary economy are 0.2,
0.7, and 0.1 respectively. If the economy is booming, stock’s A
price will be 65 and stock B will be 108. If the economy is normal,
stock’s A price will be 55 and stock’s B will be 105. If the econ
falls into recession, stock’s A price will be 40 and stock’s B will
be 102.
a) Calculate the expected return and standard deviation for each
stock.
b) Assume you create a portfolio and put 50% of you money in stock
A and 50% of you money in stock B. Calculate the portfolio expected
return and standard deviation.
Please show formula and steps