Solve problem # 3

Problems 1. Considering the world economic outlook for the Month Madison Cookies Sophie Electric coming year and estimates of sales and earning for the pharmaceutical industry, you expect the rate of return for Lauren Labs common stock to range between-20% and +40 % with the following probabilities. 0.04 0.06 0.07 0.07 0.02 -0.10 Probability Possible Returns 0.20 0.05 0.02 0.05 0.06 0.02 0.20 0.25 0.20 Compute the following. a. Average monthly rate of return R, for each stock b. Standard deviation of returns for each stock c. Covariance between the rates of return d. The correlation coefficient between the rates of returrn 0.20 0.40 What level of correlation did you expect? How did your expectations compare with the computed correlation? Would these two stocks offer a good chance for diversifi- cation? Why or why not? Compute the expected rate of return E(R) for Lauren Labs. 2. Given the following market values of stocks in your portfolio and their expected rates of return, what is the expected rate of return for your common stock port folio? 4. You are considering two assets with the following char- Market Value (SMil.) $15,000 $17,000 $32,000 $23,000 $7,000 acteristics. E(Ri)-0.15 E(,)-0.10 wi 0.5 Compute the mean and standard deviation of two port- portfolios on a risk-return graph and briefly explain the Stock E(R) E(R-)-0.20 E(o) 0.20 w2 0.5 Disney Starbucks 0.04 folios if ri,20.40 and-0.60, respectively. Plot the two Harley-Davidson Intel Walgreens results. E(Ri)=0.10 ER0.15 E()-0.03 E(2) 0.05 5+Given: The following are the monthly rates of return for Madison Cookies and for Sophie Electric during a six- month period. 3