Question
Use the following information for the problem. ____________________________________________________________________ State of Probability of Returns If State of Economy Occurs Economy State of Economy Stock S Stock
Use the following information for the problem. ____________________________________________________________________ State of Probability of Returns If State of Economy Occurs Economy State of Economy Stock S Stock T ____________________________________________________________________ Boom 0.30 0.20 (or 20%) 0.05 (or 5%) Normal 0.50 0.10 (or 10%) 0.07 (or 7%) Recession 0.20 0.05 (or 5%) 0.15 (or 15%) ________________________________________________________________________ a) Find the expected return of each stock. Use at least seven decimal places in computations of (b), (c) and (d) below to avoid significant rounding errors. b) Calculate the variance and standard deviation of returns of each stock. c) Compute the covariance and correlation of returns between the two stocks. d) Assume that you invest $40,000 in Stock S and $60,000 in Stock T. Find the expected return on the portfolio and the standard deviation of the portfolios return.
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