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Consider the following information: State Probability A B Boom 0.6 20% -5% Bust 0.4 -10% 10% What are the expected return and standard deviation of
Consider the following information:
State Probability A B
Boom 0.6 20% -5%
Bust 0.4 -10% 10%
- What are the expected return and standard deviation of stock A and stock B?
- If you invest 50% of your money in stock A and 50% of your money in stock B, what are the expected return and standard deviation for the portfolio as a whole (considering both states of the economy)?
- Use the results of a-c to explain the benefit of diversification.
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