Consider the following scenario analysis for two risky assets: Stock P and Stock Q. Probability Stock...
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Consider the following scenario analysis for two risky assets: Stock P and Stock Q. Probability Stock P Stock Q Bear Market 0.3 -20% 8% Normal Market 0.4 18% 12% Bull Market 0.3 40% -15% a. What are the expected rates of return for stocks P and Q? What are the variances and standard deviations of returns on Stocks P and Q? Provide full details of your calculations. [6 Marks] b. Assume you invest $5,000 in Stock P and $5,000 in Stock Q, what is the expected return on your portfolio? What is the standard deviation of the portfolio return? Provide full details of your calculations. [5 Marks] c. Consider your answers for part (a) and part (b), briefly explain how diversification reduces risk. [4 Marks] Consider the following scenario analysis for two risky assets: Stock P and Stock Q. Probability Stock P Stock Q Bear Market 0.3 -20% 8% Normal Market 0.4 18% 12% Bull Market 0.3 40% -15% a. What are the expected rates of return for stocks P and Q? What are the variances and standard deviations of returns on Stocks P and Q? Provide full details of your calculations. [6 Marks] b. Assume you invest $5,000 in Stock P and $5,000 in Stock Q, what is the expected return on your portfolio? What is the standard deviation of the portfolio return? Provide full details of your calculations. [5 Marks] c. Consider your answers for part (a) and part (b), briefly explain how diversification reduces risk. [4 Marks]
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Answer rating: 100% (QA)
SOLUTION a To calculate the expected rates of return variances and standard deviations of returns on Stocks P and Q we can use the following formulas ... View the full answer
Related Book For
Understanding Basic Statistics
ISBN: 9781111827021
6th Edition
Authors: Charles Henry Brase, Corrinne Pellillo Brase
Posted Date:
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