Below are the expected returns from both stocks based on the probability of economic conditions. It...

Below are the expected returns from both stocks based on the probability of economic conditions. It is desired to create a portfolio from two stocks. It is decided to invest 60% in stock A and 40% in stock B.

		Stock A
State (i)	p(i)	E(R)
Recession	0.50	-40%
Neutral	0.40	15%
Boom	0.10	30%
	1.00

		Stock B
State (i)	p(i)	E(R)
Recession	0.5	30%
Neutral	0.40	15%
Boom	0.1	-10%
	1.00

Compute the expected return and standard deviation of each stock? (5 points)
Find the covariance of stocks A and B? (5 points)
Find the correlation coefficient between stocks A and B? (5 points)
Find the expected return and standard deviation of this portfolio? (10 points)
If you were a portfolio manager, what type of investors do you recommend this portfolio and why? (5 points)

Solutions

Expert Solution

e) If i were a portfolio manager I would recommend this portfolio to an investor who is risk seeking or risk neutral because there is probability of high return but that comes with high risk.

jeff jeffy answered 1 year ago

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