Question
Supose we have three stocks: X, Y and Z. We foresee that in one year's time, there can only be two possible states of the
Supose we have three stocks: X, Y and Z. We foresee that in one year's time, there can only be two possible states of the economy: Boom or Bust. The probability tht the economy will be in a Boom state is 60%. which means that he probability of a Bust state is 40%. If a Boom state occurs, the expected returns on stocks X, Y and Z are 25% , 15 % and 10% respectively. If a Bust state occurs the expected returns on Stock x,y and z are 0%, 5% and 15% respectively.
a)Calculate hte expected return on stocks X, Y and Z.
b) suppose that we want a portfolio with 50% in stock Z and 25% each in Stocks X and Y. Calculate the expected return, variance and standard deviation of this porfolio.
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