course : investment decision

QUESTION 2 Mr Carman, a research analyst with OCB Securities, has forecast the following outcomes for the Stock Butterfly and Stock Caterpillar. State of Economy Recession Normal Boom Probability of state of Economy 0.10 0.60 0.30 Rate of Return on Share Butterfly -0.20 0.10 0.70 Rate of Return on Share Caterpillar 0.30 0.20 0.50 2a) Determine the expected return for Stock Butterfly and Stock Caterpillar? (10 Marks) 26) Determine the standard deviation for Stock Butterfly and Stock Caterpillar? (10 Marks) 2e) Compute the expected return, standard deviation and covarince of the portfolio with assumption, an investor has $200,000, where he invests $60,000 in Stock Butterfly and the remainder in Stock Caterpillar. Interpret the covariance figure. (20 Marks) (Total: 40 Marks)