The return on a portfolio during a period is defined by PVend Pvbeg PVbeg Where PVbeg is the portfolio value at the beginning of a period and PVend is the portfolio value at the end of the period Suppose there are two stocks in which you can invest, stock 1 and stock 2 During each year there is a 5...

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The return on a portfolio during a period is defined by PVend Pvbeg / PVbeg Where

Question:

The return on a during a period is defined by
PVend – Pvbeg / PVbeg

Where PVbeg is the value at the beginning of a period and PVend is the value at the end of the period. Suppose there are two in which you can invest, stock 1 and stock 2. During each year there is a 50% chance that each dollar invested in stock 1 will turn into $2 and a 50% chance that each dollar invested in stock 1 will turn into $0.50. During each year there is also a 50% chance that each dollar invested in stock 2 will turn into $2 and a 50% chance that each dollar invested in stock 2 will turn into $0.50.
a. If you invest all your money in stock 1, find the expected value and standard deviation of your one year return.
b. Assume the returns on 1 and 2 are independent random variables. If you put half your money into each stock, find the expected value and standard deviation of your one-year return.
c. Can you give an intuitive explanation of why the standard deviation in part b is smaller than the standard deviation in part a?
d. Use simulation to check your answers to part b. Use at least 1000 trials.

Stocks
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...