Question

Question 3

Consider the following information:

		(Rate of Return)	(Rate of Return)
State of Economy	Probability	Stock A	Stock B
Recession	0.30	2%	5%
Normal	0.50	7%	4%
Boom	0.20	12%	3%

Required:

a,) Calculate the expected return for the two Stocks A and B respectively.

b.) Calculate the standard deviation for the two Stocks A and B respectively.

c,) If you own a portfolio that has $1.3 million invested in Stock A and $2.2 million

invested in Stock B. Calculate the expected return and standard deviation for the

portfolio.

d.) Compute the portfolio standard deviation using the weighted average of individual

asset's standard deviation for the portfolio as mentioned in part (c) above.

e.) Comment and explain the different results obtained in parts (c) and (d) above

critically [within 200 words].

Answer 1