Stock S is expected to return 12% in a boom and 6% in a normal economy....
Stock S is expected to return 12% in a boom and 6% in a normal economy.
Stock T is expected to return 20% in a boom and 4% in a normal economy.
There is a probability of 40% that the economy will boom; otherwise, it will be normal.
What is the portfolio variance and standard deviation if 30% of the portfolio is invested in Stock S and 70% is invested in Stock T? Briefly discuss what this means to the stock.
Homework Answers
Economy Portfolio Returns
Boom =30%*12%+70%*20%=17.60%
Normal =30%*6%+70%*4%=4.60%
Expected Returns=40%*17.60%+60%*4.60%=9.80%
Variance=0.40*(17.60%-9.80%)^2+0.60*(4.60%-9.80%)^2=0.004056
Standard Deviation=sqrt(0.004056)=6.37%
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Stock S is expected to return 12% in a boom and 6% in a normal
economy....
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