Question
A) The following table represents a portfolio of two (2) assets: State of Nature Probability of State of Nature Return of Stock A under Different
A) The following table represents a portfolio of two (2) assets:
State of Nature | Probability of State of Nature | Return of Stock A under Different State of Nature | Return of Stock B under Different State of Nature |
Boom Normal Recession | 0.3 0.5 0.2 | 20% 10% 5% | 25% 20% 10% |
- What is the expected return on Stock A and Stock B? (2 marks)
- What is the standard deviation of returns of Stock A and Stock B? (4 marks)
- Which Stock is more volatile?
B) Suppose you use J$100 000 to construct a portfolio comprising of Stock A and stock B, such that you invest J$30 000 and J $70 000 in Stock A and Stock B respectively. Also
you have done some research and estimated the Beta (B) of the Stocks to be: Stock A=0.75 and Stock B=0.50.
Use the expected returns calculated for each stock in (A), above to calculate the following:
- The expected return on the portfolio. (4 marks)
- Calculate the expected beta of the portfolio. (3 marks)
- Explain briefly how you would approach diversifying this portfolio. (5 marks)
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