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Consider the following possible rates of returns on stock A, stock B, and stock Cover the next year: State of economy Probability of state Return
Consider the following possible rates of returns on stock A, stock B, and stock Cover the next year: State of economy Probability of state Return on Return on Return on occurring stock A stock B stock C Recession 0.2 -6% 18% -5% Normal 0.5 10% 6% 8% Boom 0.3 16% -18% 10% (d) Calculate the expected rate of return and standard deviation of a portfolio that is composed of 40% of A and 60% of B? (3 marks) (2) What will be the expected return and standard deviation of your investment, if you invest $4,800 in stock A, $3,600 in stock B, and $3,600 in stock C for one year? What will the expected return, if the holding period is 7 months? (6 marks) (1) Are there diversification benefits associated with forming the portfolio in part (d)? Explain why or why not
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