In: Finance
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 |
||
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.