1. 2. Calculate the expected return. ( Do not round intermediate calculations. E

Question

1.

2.

Calculate the expected return. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

3.

Calculate the expected return for the two stocks. (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)

Calculate the standard deviation for the two stocks. (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)

4.

You have $266,000 to invest in a stock portfolio. Your choices are Stock H, with an expected return of 14.1 percent, and Stock L, with an expected return of 11.7 percent.

If your goal is to create a portfolio with an expected return of 12.8 percent, how much money will you invest in Stock H and in Stock L? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

Explanation / Answer

1 State of economy Probability of State of economy Rate of return Expected Return Recession 0.40 -0.09 -0.036 Boom 0.60 0.21 0.126 Total 9.00% Expected Return = 9.00% 2 State of economy Probability of State of economy Rate of return Expected Return Recession 0.22 -0.12 -0.0264 Normal 0.48 0.14 0.0672 Boom 0.30 0.33 0.099 Total 13.98% Expected Return = 13.98% Rate of return 3 State of economy Probability of State of economy StockA Stock B Expected Return Stock A =E(Ra) Expected Return Stock B =E(Rb) StockA return square *probability Stock b return square *probability 1 Recession 0.23 0.025 -0.38 0.00575 -0.0874          0.0001      0.0332 Normal 0.58 0.105 0.28 0.0609 0.1624          0.0064      0.0455 Boom 0.19 0.27 0.51 0.0513 0.0969          0.0139      0.0494 Total 11.80% 17.19%          0.0204      0.1281 % Expected Return Stock A =E(Ra) 11.80% Expected Return Stock B =E(Rb) 17.19% 2 Standard deviation = Sq root of [ Sum of Stockreturn square*probability - square of mean ] Std devaition stock A = Sq root[ 0.0204 - 0.118^2]                                           = Sq root of 0.006476                                           =0.08047                                           = 8.047% Std devaition stock B = Sq root[ 0.1281 - 0.1719^2]                                             = Sq root of 0.09855                                             = 31.39% Std deviation stock A 8.047% Std deviation stock B 31.39% 4 Investment Amt       266,000 Expected return@12.8%         34,048 Assume amt invested in H =x Amount invested in L= 266000-x So, x*0.141 +(266000-x)*0.117 =34048 0.141x +31122-0.117x=34048 0.024x=2926 x= 121917 So, Invetment in H       121,917 Investment in L       144,083

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