Question
Question 2 Consider that there are four equally likely states of the economy: depression, recession, normal and boom. The returns on the Running Company (RC)
Question 2
Consider that there are four equally likely states of the economy: depression, recession, normal and boom. The returns on the Running Company (RC) are expected to follow the economy closely, while the returns on the Tumbling Company (TC) are not. The returns predictions are as follows:
| State of economy | Running Company | Tumbling Company |
| Depression | -20% | 15% |
| Recession | 10% | 10% |
| Normal | 20% | -5% |
| Boom | 30% | -10% |
Required:
- calculate the expected return for each of the company.
- calculate the variance and standard deviation for each of the company.
- based on your computation above evaluate and comment on the risk and return.
- if the correlation coefficient of the stock of RC and TC is 0.4, would you invest in the two stocks as a portfolio? Comment on your answer.
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Mergers Acquisition And Other Restructuring Activities
Authors: Donald M. Depamphilis
6th Edition
123854857, 978-0123854858
