Question
Your portfolio only has two stocks. You invest 500,000 on stock A and 300,000 on stock B. Following is the information about the market and
Your portfolio only has two stocks. You invest 500,000 on stock A and 300,000 on stock B. Following is the information about the market and stocks. What is the required rate of the return on this portfolio? (Hint: S&P 500 index is a well-diversified market portfolio)
Risk free rate | 2% |
S&P index return | 8% |
Standard Deivation of Stock A | 10% |
Standard Deivation of Stock B | 15% |
Standard Deviation of S&P index | 9% |
Correlation between Stock A's return and S&P 500 return | 0.65 |
Correlation between Stock B's return and S&P 500 return | 0.50 |
A) | 5.01% |
B) | 6.57% |
C) | 7.54% |
D) | 8.81% |
Using the following information for Question 19 and 20.
Stock A has the following returns for various states of the economy:
State of the Economy Probability Stock A's Return
Recession 10% -30%
Below Average 20% -2%
Average 40% 10%
Above Average 20% 18%
Boom 10% 40%
19)What is Stock A's expected return
A) 5.85%.
B) 7.2%.
C) 8.2%.
D) 9.6%
20) What is Stock A's standard deviation?
A) 13.85%.
B) 14.42%.
C) 15.84%.
D) 16.98%
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