FIN 340 Ch. 11 -Week 8 Use the following information to answer the questions: St
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FIN 340 Ch. 11 -Week 8 Use the following information to answer the questions: Stock A Stock B State of Economy Probability Price Dividend Price Dividend Recession Normal Boom 0.25 0.45 0.3 (in 1 yr) $135 $150 $162 $2 $2 $2 (in 1 yr) $45 $42 $39 $1.50 $1.50 $1.50 1. Calculate the expected return and standard deviation for each of the two stocks. The current price for Stock A is $142 and the current price for Stock B is $38. 2. If you were to form a portfolio in which you have 35% of the portfolio invested in Stock A, and 65% in Stock B, what would the expected return and standard deviation for the portfolio be?Explanation / Answer
Answer for question no.1:
Expected return and standard deviation of stock A
Expected return and standard deviation of stock B:
Answer for question no.2:
Expected return of the portfolio=Weight in Stock A* Expected return of stock A+Weight in Stock B* Expected return of stock B
=35%*1.34%+65%*3.59%
=2.81%.
Standard deviation of the portfolio is sqaure root of variance of portfolio.
Variance of a portfolio =Weight of stock A^2*Standard devition of Stock A^2+Weight of stock A^2*Standard devition of Stock A^2+2* Weight of stock A*Weight of stock B* Covariance of stock A and B
Covariace of stock A and stock B is calculated as below:
Subtituting the values=.35^2*0.0038%^2+.65*0.027%^2+2*.35*.65*(-.00017133)
=-.00007%
Standard deviation of square root of varinace=-0.00004%.
State of economy Probability Price Dividend Return=dividend/Price Prob*Return(a) (Variance(a)-Expected return)^2 Prob*(a) Recession 0.25 135 2 1.48% 0.37% 0.0094% 0.0024% Normal 0.45 150 2 1.33% 0.60% 0.0055% 0.0025% Boom 0.3 162 2 1.23% 0.37% 0.0094% 0.0028% Expected retun 1.34% Variance 0.0076% Standard deviation=Square root(Variance) 0.0038%Related Questions
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