Stocks Intel and GE have the following probability distributions of expected fut

Question

Stocks Intel and GE have the following probability distributions of expected future returns:



Returns%
Period Probability Intel GE
Boom 0.4 20 10
Normal 0.3 15 10
Recession 0.3 12 8

1) Compute the expected rate of returns for Intel and GE. (5)

2) Compute the risks of holding Intel and GE (10)

3) Which one is more risky Intel or GE? (5)

4) Construct a portfolio where 60% is invested in Intel and 40% in GE and compute the
expected rate of return for the portfolio. (5)

5) Compute the covariance of the two return series. (10)

6)Compute the correlation coefficient of the two return series. (5)

7) Compute the risk of the portfolio.

Explanation / Answer

1)expected rate of returns for Intel = 0.4 * 20 + 0.3 * 15 + 0.3*12 =16.1% expected rate of returns for GE = 0.4 * 10 + 0.3 * 10 + 0.3*8 =9.4% 2)risks of holding Intel = sqrt[0.4 *( 16.1-20)^2 + 0.3 * (16.1-15)^2 + 0.3*(16.1-12)^2] =3.39% risks of holding GE = sqrt[ 0.4 * (9.4-10)^2 + 0.3 * (9.4-10)^2 + 0.3*(8-9.4)^2] = 0.917% Intel is more risky 3)Expected return of the portfolio = .6*16.1% +.4*9.4% = 13.42%

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