Question

In: Finance

Price Today, A Price Today, B State Tomorrow Probability Price Tomorrow, A Price Tomorrow, B 30...

Price Today, A	Price Today, B	State Tomorrow	Probability	Price Tomorrow, A	Price Tomorrow, B
30	20	Good	0.5	60	40
		Bad	0.5	15	5

1a). Given the following information, calculate the correlation coefficient between the returns on

stocks A and B

a. 0

b. 0.25

c. 0.5

d. 0.75

e. 1

1b). Calculate expected return and standard deviation of the portfolio that is allocated 40% to A, 60% to B.

Expert Solution

Correlation coefficient between the returns on stock A and stock B is calculated in excel and screen shot provided below:

Correlation coefficient between the returns on stock A and stock B is 1.

Option (E) is correct answer.

1(b)

Expected return and standard deviation of stock A is calculated in excel and screen shot provided below:

Expected return of stock A is 25% and standard deviation is 75%.

Expected return and standard deviation of stock B is calculated in excel and screen shot provided below:

Expected return of stock B is 12.50% and standard deviation is 87.50%.

Expected return of portfolio = (40% × 25%) + (60% × 12.50%)

= 10% + 7.50%

= 17.50%

Expected return of portfolio is 17.50%.

jeff jeffy answered 2 years ago

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