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Question 5: You are considering the three securities listed below. State Economy of Probability of Rate of Return if State State of Occurs Economy Stock
Question 5: You are considering the three securities listed below. State Economy of Probability of Rate of Return if State State of Occurs Economy Stock A Stock B 15% 21% -2% Boom Normal 80% 11% 9% Bust 5% -18% 12% a) Calculate the expected return and standard deviation of returns for each security. (6 marks) b) If you construct a portfolio by investing 50 percent in stock A and 50 percent in stock B, what will be the portfolio expected return and standard deviation of returns? (6 marks) c) Compare your results in part (a) and (b), does your expected return and standard deviation improved by constructing the portfolio? Explain why. (You may use graph to support your answer.) (8 marks)
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