Question
Consider the following information about two stocks where the probability of an economic boom is 40%: Economic State Return A (RA) Return B (RB) Boom
Consider the following information about two stocks where the probability of an economic boom is 40%:
Economic State Return A (RA) Return B (RB)
Boom 38% 6%
Recession -4% 12%
1.1. Calculate the expected return for stock A and stock B. (2)
1.2. Calculate the standard deviation of stock A and stock B. (3)
1.3. Calculate the correlation between stock A and stock B. (4)
1.4. Calculate the total risk (standard deviation) of a portfolio, where 1/8 of your money is invested in stock A, and 7/8 of your money is invested in stock B. (Hint: use the method with the formula for the risk of a portfolio (i.e., using the covariance)). (4)
1.5. Calculate the expected return on a portfolio with equal proportions in the risky assets, and 30% in a risk-free asset which has a return of 10%.
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