Question

In: Accounting

Rand Inc. and McNally Corp. have the following probability distribution of returns: Probability Rand Returns McNally...

Rand Inc. and McNally Corp. have the following probability distribution of returns: Probability Rand Returns McNally Returns
0.3 15% 12% 0.4 9 5 0.3 18 20
a) Calculate the expected rates of return for the two stocks.
b) Calculate the standard deviation of returns for the two stocks.
c) Calculate the expected return and standard deviation on a portfolio P made up of 75%
invested in McNally stock and the remaining invested in Rand stock.

Solutions

Expert Solution

Solution:-

a) Calculate the expected rates of return for the two stocks

Rand Inc. McNally Corp.
Expected Return 13.50% 11.60%

Explanation:-

Calculation of expected return of Rand Inc.:-

b) Calculate the standard deviation of returns for the two stocks:-

Rand Inc. McNally Corp.
Standard Deviation 3.85% 6.22%

Explanation:-

c) Calculate the expected return and standard deviation on a portfolio P made up of 75% invested in McNally stock and the remaining invested in Rand stock:-

Expected return of Portfolio () 12.08%
Standard deviation of Portfolio 5.61%

Explanation:-

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