Question

Refer to the following table
Construct an equal-weighted (50/50) portfolio of Investments A and B. What is the expected rate of
return and standard deviation of the portfolio? Explain your results.

State	Probability	A	B	AB
Very poor	0.1	-10%	-25%	-17.5%
Poor	0.2	0%	-5%	-2.5%
Average	0.4	10%	15%	12.5%
Good	0.2	20%	35%	27.5%
Very good	0.1	30%	55%	42.5%

Answer 1

Results:

Portfolio Expected Return = 12.50% Standard Deviation = 16.43%

Stock A Expected Return = 10% Standard Deviation = 10.93%

Stock B Expected Return = 15% Standard Deviation = 21.91%

By equally investing in stock A and stock B we are getting the expected return of 12.50% with just 16.43% of Standard deviation.