Question
he annual rate of return and related probabilities given below summarise your analysis for two securities. Security A Security B Rate of Return Probability Rate
he annual rate of return and related probabilities given below summarise your analysis for two securities. Security A
Security B
Rate of Return
Probability
Rate of Return
Probability
10%
45%
5%
30%
14%
35%
15%
30%
18%
20%
25%
40%
Required:
a. Calculate the expected rate of return, E(R), for each security. (2 marks)
b. Calculate the standard deviation, , for each security. (3 marks)
c. Which security should you purchase? Explain why you make such choice. (2 marks)
d. Imagine that you will make a portfolio that consists of 30% of Security A and 70% of Security B, assuming the covariance between A and B (A,B) is -0.0026. Based on the answer you obtain from a) and b), calculate the expected return, E(RP), and standard deviation, P, of your portfolio. (5 marks)
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