Question
Suppose you have invested only in two stocks, A and B. You expect that returns on the stocks depend on the following three states of
Suppose you have invested only in two stocks, A and B. You expect that returns on the stocks depend on the following three states of economy, which are equally likely to happen.
Show work in four decimal places and equations
| State of the Economy | Return on Stock A | Return on Stock B | ||
| Recession | 3.0% | 6.0% | ||
| Normal | 6.0% | 6.0% | ||
| Boom | 9.0% | 27.0% | ||
Q. 1. Calculate the expected return of each stock.
Q. 2. (a) Calculate the variance of each stock. (b) Which one is riskier according to your calculation? Why?
Q. 3. (a) Calculate the standard deviation of each stock. (b) Which one is riskier according to your calculation? Why?
Q. 4. (a) Calculate the coefficient of variation of each stock. (b) Which stock is riskier according to your calculation? Why?
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Corporate Finance Principles And Practice
Authors: Denzil Watson, Antony Head
5th Edition
0273725343, 978-0273725343
