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Pierre is considering a portfolio with 50% invested in Stock A and 50% invested in Stock B. These are the expected returns. Economic State Probability
Pierre is considering a portfolio with 50% invested in Stock A and 50% invested in Stock B. These are the expected returns.
Economic State Probability of State Return on Stock A Return on Stock B Return on Portfolio
Poor 0.30 -15% 25%
Fair 0.50 10% 5%
Boom 0.20 30% -5%
Questions:
- What is the return on the total portfolio?
- What is the variance and standard deviation of the portfolio?
- Are the two stocks positively or negatively correlated? Why?
NB: Please show step-by-step calculations and give a detailed explanation for question 3.
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