2. Consider the following data for two stocks State of the Probability Return on 1 Return...

 

Transcribed Image Text:

2. Consider the following data for two stocks State of the Probability Return on 1 Return on 2 Economy Bad 1/3 0.05 -0.05 Average 1/3 0.05 0.18 Good 1/3 0.15 0.18 Expected return: 0.083 Standard deviation: 0.047 a. What are the expected return and standard deviation on stock 2? b. What is the correlation between 1 and 2? c. Portfolio P is 1/3 in stock 1 and 2/3 in stock 2. What are the expected return and standard deviation of P? d. Our combined portfolio ($10,000 net worth) is divided 40% in the T-bills (currently paying 5%) and 60% in the portfolio P described in the last question. What are the expected return and standard deviation of our combined portfolio? 2. Consider the following data for two stocks State of the Probability Return on 1 Return on 2 Economy Bad 1/3 0.05 -0.05 Average 1/3 0.05 0.18 Good 1/3 0.15 0.18 Expected return: 0.083 Standard deviation: 0.047 a. What are the expected return and standard deviation on stock 2? b. What is the correlation between 1 and 2? c. Portfolio P is 1/3 in stock 1 and 2/3 in stock 2. What are the expected return and standard deviation of P? d. Our combined portfolio ($10,000 net worth) is divided 40% in the T-bills (currently paying 5%) and 60% in the portfolio P described in the last question. What are the expected return and standard deviation of our combined portfolio?