Stock S is expected to return 12% in a boom and 6% in a normal economy....

Stock S is expected to return 12% in a boom and 6% in a normal economy. Stock T is expected to return 20% in a boom and 4% in a normal economy.

There is a probability of 40% that the economy will boom; otherwise, it will be normal.

What is the portfolio variance and standard deviation if 30% of the portfolio is invested in Stock S and 70% is invested in Stock T? Briefly discuss what this means to the stock.

Solutions

Expert Solution

Standard deviation of Portfolio

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

Hope this will help, please do comment if you need any further explanation. Your feedback would be appreciated.

jeff jeffy answered 6 months ago

Next > < Previous

Related Solutions

Stock S is expected to return 12 percent in a boom and 6 percent in a...

Stock S is expected to return 12 percent in a boom and 6 percent in a normal economy. Stock T is expected to return 20 percent in a boom and 4 percent in a normal economy. There is a 40 percent probability that the economy will boom; otherwise, it will be normal. What is the portfolio variance if 30 percent of the portfolio is invested in Stock S and 70 percent is invested in Stock T? A. .002220 B. .008080 C. .006224 D....

Malone Imports stock should return 12 percent in a boom, 10 percent in a normal economy,...

Malone Imports stock should return 12 percent in a boom, 10 percent in a normal economy, and 2 percent in a recession. The probabilities of a boom, normal economy, and recession are 5 percent, 85 percent, and 10 percent, respectively. What is the variance of the returns on this stock? Please explain your answer.

Stock A is expected to return 12 percent in a normal economy and lose 7 percent...

Stock A is expected to return 12 percent in a normal economy and lose 7 percent in a recession. Stock B is expected to return 8 percent in a normal economy and 2 percent in a recession. The probability of the economy being normal is 80 percent and the probability of a recession is 20 percent. What is the covariance of these two securities? Please SHOW Work Not JUST ExCell Thank You

If the economy is normal, Charleston Freight stock is expected to return 16.5 percent.

If the economy is normal, Charleston Freight stock is expected to return 16.5 percent. If the economy falls into a recession, the stock's return is projected at a negative 11.6 percent. The probability of a normal economy is 80 percent while the probability of a recession is 20 percent. What is the variance of the returns on this stock? A. 0.010346 B. 0.012634 C. 0.013420 D. 0.013927 E. 0.014315

Stock A pays 30% in a boom, 5% in a normal economy and -20% in a...

Stock A pays 30% in a boom, 5% in a normal economy and -20% in a recession. If we are equally likely to see a boom, a normal economy and a recession next year, what is the standard deviation of the one-year return on stock A? Enter your result as a percentage point without the % sign, and round it to the second decimal point (i.e., if the answer is 10.3456%, enter it as 10.35).

Stock A pays 40% in a boom, 5% in a normal economy, and -20% in a...

Stock A pays 40% in a boom, 5% in a normal economy, and -20% in a recession. Stock B pays -10% in a boom, 10% in a normal economy, and 15% in a recession. If all three states of the economy are equally likely next year, what is the one-year expected return on a portfolio that is 70% stock A and 30% stock B? Enter your answer as a percentage point without the % sign, and round it to the...

If the economy enters a boom, the stock of Company E will return 20% and the...

If the economy enters a boom, the stock of Company E will return 20% and the stock of Company F will return 40%. On the other hand, if the economy enters a recession, the stock of Company E will return -10% and the stock of Company F will return -25%. The boom state is one-and-one-half times as likely as the recession state. The risk-free rate in the market is 2%, while the risk premium of the market portfolio is 6%....

state of the economy probability of occurrence expected return on stock A expected return on stock...

state of the economy probability of occurrence expected return on stock A expected return on stock B High growth 0.1 60% 5% Moderate growth 0.2 20% 20% No growth 0.5 10% 5% Recession 0.2 -25% 0% 1)Calculate the weighted average of the standard deviation of individual stocks A and B ; and show that each portfolio standard deviation is less than this weighted average except the portfolio standard deviation with correlation of 1. 2) Given correlation of -1, what portfolio...

Scenario Probability Return on stock A Return on stock B Boom 50% 20% 2% Normal 25%...

Scenario Probability Return on stock A Return on stock B Boom 50% 20% 2% Normal 25% 15% 6% Recession 25% 10% 12% a) If you invest 70% of your funds into stock A and 30% into stock B, what is the expected return of your portfolio in each state of the economy? b) Use your knowledge of risk and return to explain why the portfolio is more heavily invested in Asset A (70%) than Asset B (30%). c) What is the overall expected...

The probability of state in boom economy is 20%. The rate of stock return is 20%...

The probability of state in boom economy is 20%. The rate of stock return is 20% and the bond rate of return is 10%. The probability of state in normal good growth economy is 25%. The stock rate of return is 10% and the bond rate of return is 5% The probability of state in normal growth economy is 15%. The stock rate of return is 3% and the bond rate of return is 5% The probability of state in...

Subjects