FOR THE FOLLOWING QUESTION, DO NOT USE EXISTING DATA USED IN CLASS. POINTS WILL
ID: 3059864 • Letter: F
Question
FOR THE FOLLOWING QUESTION, DO NOT USE EXISTING DATA USED IN CLASS. POINTS WILL BE DEDUCTED FOR USING THE SAME DATA.
Consider the return per $2,000 for two types of stock investments:
Probability
Scenario
Stock A
Stock B
0.3
Bear Market
-$75
-$250
0.6
Stable Market
+40
+100
0.4
Bull Market
+200
+500
Suppose 30% is invested in Stock A and 70% is invested in Stock B:
{C} i. Compute the investment return mean for each stock
{C} ii. Compute the investment return variance and standard deviation for each stock. Interpret the standard deviation results
{C} iii. Compute the investment return covariance and interpret the covariance result
{C} iv. Compute the portfolio expected return
{C} v. Compute the portfolio expected risk
Probability
Scenario
Stock A
Stock B
0.3
Bear Market
-$75
-$250
0.6
Stable Market
+40
+100
0.4
Bull Market
+200
+500
Explanation / Answer
i) Stock A return = 0.3*(-75)+0.6*40+0.4*200 = $81.5
Stock B return = 0.3*(-250)+0.6*100+0.4*500 = $185
ii) Stock A variance = 0.3*(-75)*(-75)+0.6*40*40+0.4*200*200 -81.5*81.5 = 12005.25
Stock B variance = 0.3*(-250)*(-250)+0.6*100*100+0.4*500 *500-185*185 = 90525
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