11.2. Below are the expected returns from both stocks based on the probability of economic conditions. It is desired to create a portfolio from two stocks. It is decided to invest 30% in stock A and 70% in stock B. Stock A State (i) p(i) E(R) Recession 0.50 -40% Neutral 0.40 15% Вoom 0.10 30% 1.00 Stock B State (i) p(i) E(R) Recession 0.5 40% Neutral 0.40 15% Вoom 0.1 -20% 1.00 a- Compute the expected return and standard deviation of each stock. b- Find the covariance of stocks A and B? c- Find the correlation coefficient between stocks A and B?( d- Find the expected return and standard deviation of this portfolio? e- If you were a portfolio manager, what type of investors do you recommend this portfolio and why? f- Explain why the beta of the market is always equal to 1 and beta of a treasury bill equal to 0.
11.2. Below are the expected returns from both stocks based on the probability of economic conditions. It is desired to create a portfolio from two stocks. It is decided to invest 30% in stock A and 70% in stock B. Stock A State (i) p(i) E(R) Recession 0.50 -40% Neutral 0.40 15% Вoom 0.10 30% 1.00 Stock B State (i) p(i) E(R) Recession 0.5 40% Neutral 0.40 15% Вoom 0.1 -20% 1.00 a- Compute the expected return and standard deviation of each stock. b- Find the covariance of stocks A and B? c- Find the correlation coefficient between stocks A and B?( d- Find the expected return and standard deviation of this portfolio? e- If you were a portfolio manager, what type of investors do you recommend this portfolio and why? f- Explain why the beta of the market is always equal to 1 and beta of a treasury bill equal to 0.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
![11.2. Below are the expected returns from both stocks based on the
probability of economic conditions. It is desired to create a
portfolio from two stocks. It is decided to invest 30% in stock A
and 70% in stock B.
Stock A
State (i)
Recession
p(i)
E(R)
0.50
-40%
Neutral
0.40
15%
Boom
0.10
30%
1.00
Stock B
State (i)
Recession
p(i)
E(R)
0.5
40%
Neutral
0.40
15%
Boom
0.1
-20%
1.00
a- Compute the expected return and standard deviation of each
stock:
b- Find the covariance of stocks A and B?
c- Find the correlation coefficient between stocks A and B?
d- Find the expected return and standard deviation of this
portfolio?
e- If you were a portfolio manager, what type of investors do
you recommend this portfolio and why?
f- Explain why the beta of the market is always equal to 1 and
beta of a treasury bill equal to 0.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F62cb45e4-b868-4af7-95f7-874fb7858a8d%2F651adef1-f612-4c7b-b05f-557c4976a75c%2Fulbzzfm_processed.jpeg&w=3840&q=75)
Transcribed Image Text:11.2. Below are the expected returns from both stocks based on the
probability of economic conditions. It is desired to create a
portfolio from two stocks. It is decided to invest 30% in stock A
and 70% in stock B.
Stock A
State (i)
Recession
p(i)
E(R)
0.50
-40%
Neutral
0.40
15%
Boom
0.10
30%
1.00
Stock B
State (i)
Recession
p(i)
E(R)
0.5
40%
Neutral
0.40
15%
Boom
0.1
-20%
1.00
a- Compute the expected return and standard deviation of each
stock:
b- Find the covariance of stocks A and B?
c- Find the correlation coefficient between stocks A and B?
d- Find the expected return and standard deviation of this
portfolio?
e- If you were a portfolio manager, what type of investors do
you recommend this portfolio and why?
f- Explain why the beta of the market is always equal to 1 and
beta of a treasury bill equal to 0.
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