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AFG Professional Money Management is considering three possible stocks. The returns from each one depends on next years economic state and are provided in the
AFG Professional Money Management is considering three possible stocks. The returns from each one depends on next years economic state and are provided in the following table.
State of the Economy |
Probability of Economic State |
Returns for Stock A |
Returns for Stock B |
Returns for Stock C |
Recession | .25 | .10 | .09 | .14 |
Stability | .35 | .14 | .13 | .12 |
Boom | .40 | .16 | .18 | .10 |
- Given the above information, find each stocks expected rate of return, variance and standard deviation.
- Rank each stock based on (1) expected return and (2) risk. Which investment do you choose and why?
- Suppose AFG decides to invest in all three stocks. What is the expected return on the portfolio of the three stocks with equal amounts of money invested in each one?
- What is the variance and standard deviation of the portfolio of the three stocks constructed in part c?
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