Question
The returns of stocks Avoxx (A) and Bioxant (B) depend on the approval of Avoxx's latest drug as follows: FDA Regulatory Decision Probability Return Return
The returns of stocks Avoxx (A) and Bioxant (B) depend on the approval of Avoxx's latest drug as follows:
FDA Regulatory Decision | Probability | Return | Return |
---|---|---|---|
Approved | 30% | 50% | 25% |
Rejected | 70% | 12% | 5% |
A) What are the expected returns and standard deviations of A and B? (Note: Your answer should be a number in percentage form. Do not enter '%'.)
E[]=____%
E[B]= ____%
SD()= ____%
SD(B)= ____%
Hint: When we know the probability of every value of , we can calculate the expected value of as,
E[]= .
The variance is,
Var()=E[2]E2[]=2()2 ,
and the standard deviation is SD()=Var().
B) What is the correlation between A and B? (Note: Your answer should be a number between -1 and 1.)
Corr(,) =
Hint: When we know the probability of every value of the pair (,), we can calculate the covariance between and as,
Cov(,)=E[]E[]E[]=,,()() .
Their correlation is,
Corr(,)=Cov(,)SD()SD() .
C) What is the expected return and standard deviation of an equal-weighted portfolio of A and B? (Note: Your answer should be a number in percentage form. Do not enter '%'.)
E[]=___%
SD()=____%
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