Economic Conditions Probability Return on Investment A Return on Investment B Poor 0.2 25% -2% Fair...

Economic Conditions	Probability	Return on Investment A	Return on Investment B
	Poor	0.2	25%	-2%
	Fair	0.5	12%	8%
	Good	0.3	4%	30%

An investor is considering the following two investment opportunities. The returns for each, under different economic conditions are forecast as above.

a.    Calculate the expected returns and standard deviation of returns for A and B.

b.    Assume that a portfolio is equally weighted between Investment A and Investment B. What would be the expected return and standard deviation on the portfolio?

c.    Which investment, A, B, or the equally weighted portfolio would you recommend and why?

Solutions

Expert Solution

(c) As we can see that Coefficient of variation i e, standard deviation divided by expected return will be lowest in case of portfolio which will be 3.06/12.4=0.2468.

Hence I would recommend investing in portfolio because we get the diversification benefit of risk when we combine stocks A and B .

jeff jeffy answered 1 year ago

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