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Suppose that there are two possible states of the world next year: boom or recession. Suppose that we forecast the following probabilities of these states
Suppose that there are two possible states of the world next year: boom or recession. Suppose that we forecast the following probabilities of these states and the returns to two US stocks, CXW (Corrections Corp of America; a prison stock) and AMR (parent of American Airlines). Calculate the standard deviation of returns to a portfolio invested 20% in CXW, and 80% in AMR. Please give your answer to four decimal places.
| STATE | Prob. | R(CXW) | R(AMR) |
| Boom | 0.6 | -0.1 | 0.25 |
| Recession | 0.4 | 0.1 | -0.25 |
Choose:
| a. | 0.0311 | |
| b. | 0.0000 | |
| c. | 0.1764 | |
| d. | 0.1728 | |
| e. | 0.4157 | |
| f. | 0.0127 | |
| g. | 0.0602 | |
| h. | 0.1129 | |
| i. | 0.2453 | |
| j. | None of the above is correct. |
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