Using the following information find expected return, variance and standard devi
ID: 2637382 • Letter: U
Question
Using the following information find expected return, variance and standard deviation of Stock A and B. Also find the covariance and correlation between Stock A and B.
States
Probability
Return on Stock A
Return on Stock B
1
20.00%
26.00%
9.00%
2
30.00%
18.00%
15.00%
3
50.00%
10.00%
30.00%
If you invest 10,000 in stock A and 15,000 in stock B what would be your portfolio return and risk. Use information from question 2 if necessary. Please show work for all
States
Probability
Return on Stock A
Return on Stock B
1
20.00%
26.00%
9.00%
2
30.00%
18.00%
15.00%
3
50.00%
10.00%
30.00%
Explanation / Answer
Return From A=0.2*26+0.3*18+0.5*10 15.6 Return From B=0.2*9+0.3*15+0.5*30 21.3 Variance of A=0.2*(26-15.5)^2+0.3*(18-15.6)^2+0.5*(10-15.6)^2 39.46 SD of A=Square Root(39.46) 6.28 Variance of B=0.2*(9-21.3)^2+0.3*(15-21.3)^2+0.5*(30-21.3)^2 80.01 SD of B=Square Root(80.01) 8.94 Return From A &B = (10000*15.6+15000*21.3)/25000 19.02
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