Miller Trust Corporation is considering a portfolio with 85% weighting in a cyclical stock and 15% weighting
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Question:
Miller Trust Corporation is considering a portfolio with 85% weighting in a cyclical stock and 15% weighting in a countercyclical stock. It is expected that there will be four economic states: Excellent, Good, Average and Bad, each with equal probabilities of occurrence. The cyclical stock is expected to have returns of 35%, 25% and 1%, -2% in Excellent, Good, Average and Bad economies respectively. The countercyclical stock is expected to have returns of -15% -6%, 2% and 14% in Excellent, Good, Average and Bad economies respectively. Given this information, calculate (rounded to 4 decimal places):
- Expected return for the portfolio;
- Variance for the portfolio's returns.
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