HPR is the Holding Period Return or just simply the RETURN Use the following probability distributions for
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Question:
HPR is the Holding Period Return or just simply the RETURN | ||||||||
Use the following probability distributions for stocks X and Y to answer the questions that follow. | ||||||||
State of nature | Probability | HPR(X) | HPR(Y) | |||||
Boom | 0.20 | 0.3200 | -0.0150 | |||||
Normal | 0.60 | 0.1200 | 0.0850 | |||||
Recession | 0.20 | -0.0900 | 0.1000 | |||||
Calculate | ||||||||
a. | Calculate the variance of the returns for Stocks X and Y. | |||||||
b. | Calculate the covariance of the returns for X and Y. | |||||||
c | Calculate the correlation of the returns for X and Y. | |||||||
d | Interpret the correlation coefficient from part (c) (one or two sentences). | |||||||
e | Form a portfolio of 80% in X and 20% in Y. Calclulate the portfolio variance using two different approaches. | |||||||
Note: using covariance and/or correlation is the same approach. |
Related Book For
Fundamentals of Investing
ISBN: 978-0133075359
12th edition
Authors: Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk
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