Question

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.

Answer 1

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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