Using the following information find the expected return, variance, and standard
ID: 3416282 • Letter: U
Question
Using the following information find the 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%
18.005
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 the information from question 1 if necessary. (Please show work)
States
Probability
Return on Stock A
Return on Stock B
1
20.00%
26.00%
9.00%
2
30.00%
18.005
15.00%
3
50.00%
10.00%
30.00%
Explanation / Answer
Stock A:
expected return = (26x.2)+(18x.3)+(10x.5)= 15.6%
variance=[ standard deviation^2]= (6.248^2)= 39.04
standard deviation={ [(26-15.6)^2x.2]+[(18-15.6)^2x.3]+[(10-15.6)^2x.5]}^1/2= 6.248
Stock A:
expected return = (9x.2)+(15x.3)+(30x.5)= 21.3%
Varaince=8.945^2= 80.01
standard deviation={ [(9-21.3)^2x.2]+[(15-21.3)^2x.3]+[(30-21.3)^2x.5]}^1/2= 8.945
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