Question
Consider the two assets A and B for which returns (%) under different conditions of economy are given as below. Returns (%) State of the
Consider the two assets A and B for which returns (%) under different conditions of economy are given as below.
Returns (%) | |||
State of the Economy | Probability | Stock A | Stock B |
Recession | 0.1 | -16 | -12 |
Above Average | 0.2 | -3 | 4 |
Average | 0.4 | 14 | 10 |
Below Average | 0.2 | 28 | 15 |
Boom | 0.1 | 35 | 20 |
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Find the expected return of each asset
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Find the risk (as measured by standard deviation of return) of each asset
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If an investor decides to invest $8,000 in stock A and $12,000 in stock B, calculate the expected returns of the investors portfolio of stocks A and B.
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Using the information, calculate the portfolios standard deviation if the correlation of the returns between stocks A and B returns is -0.25.
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