Must show work Consider the following information on two stocks: State of the Ec
ID: 2626574 • Letter: M
Question
Must show work Consider the following information on two stocks:
State of the Economy
Probability of State of Economy
Stock 1
Rate of Return
Stock 2
Rate of Return
Boom
.35
.12
-.28
Normal
.5
.4
.09
Bust
.15
.53
.48
If you have a portfolio that is made up of 50% of stock 1 and 50% of stock 2, what is the portfolio expected return, variance and standard deviation?
State of the Economy
Probability of State of Economy
Stock 1
Rate of Return
Stock 2
Rate of Return
Boom
.35
.12
-.28
Normal
.5
.4
.09
Bust
.15
.53
.48
Explanation / Answer
The expected return of an asset is the sum of the probability of each return occurring times the probability of that return occurring.
So, the expected return of each stock asset is:
E(RA) = .35(.12) + .5(.4) + .15(.53)
E(RA) = 0.3215 or 32.15%
E(RB) = .35(
State of economy Probability Stock 1 Rate of return Actual return Stock 2 Rate of return Actual return Boom 0.35 0.12 0.042 -0.28 -0.098 Normal 0.5 0.4 0.2 0.09 0.045 Bust 0.15 0.53 0.0795 0.48 0.072 32.2% 1.9% Covariance 0.29% Correlation 56.83%The expected return of an asset is the sum of the probability of each return occurring times the probability of that return occurring.
So, the expected return of each stock asset is:
E(RA) = .35(.12) + .5(.4) + .15(.53)
E(RA) = 0.3215 or 32.15%
E(RB) = .35(
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