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Consider the following possible returns on stock A, stock B, and the market portfolio over the next year: State of economy Probability of state occurring
- Consider the following possible returns on stock A, stock B, and the market portfolio over the next year:
| State of economy | Probability of state occurring | Return on stock A | Return on stock B | Return on market |
| Recession | 0.2 | -6% | 20% | -5% |
| Normal | 0.5 | 10% | 8% | 8% |
| Boom | 0.3 | 18% | -20% | 12% |
- What are the betas of the two stocks?
- Calculate the expected return and standard deviation of a portfolio that is composed of 40% of A and 60% of B.
- What do your answers in parts (b), (c), and (e) imply about diversification?
- A broker has advised you not to invest in stock B because it has a higher standard deviation. Is the brokers advice sound for a risk-averse investor like yourself? Why or why not?
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The Practical Guide To Wall Street Equities And Derivatives
Authors: Matthew Tagliani
1st Edition
0470383720, 978-0470383728
