Stock A is expected to produce the following returns given various states of the economy: Table 1
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Stock A is expected to produce the following returns given various states of the economy: Table 1 - Stock A
State of Economy | Probability of state of Economy | Possible Return |
Good | 70% | 20% |
Bad | 30% | 12% |
Table 2 - Stock B and Stock C
Stock | Expected Return | Standard Deviation | Correlation Coefficient with A |
B | 25% | 15% | 0.8 |
C | 18% | 12% | -0.2 |
1) What is the expected return of stock A? 2) What is the standard deviation of the expected return of stock A? 3) If an investor is considering combine stock A with another stock to build a two-stock portfolio, which one of the two (Stock B or Stock C) is a better choice with the given information in Table 2 and why?
Please show all the work.
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