You are considering to invest in Stock A and Stock B. The expected returns% of the...

  

Transcribed Image Text:

You are considering to invest in Stock A and Stock B. The expected returns% of the stocks under different economic conditions are as follows: Probability Stock A return% Stock B return% Bear Market Normal Market 0.2 -40% 20% 0.5 20% 10% Bull Market 0.3 50% -25% (a) Calculate the expected returns% and standard deviation of Stock A and Stock B respectively. (b) (i) Based on your answer in (a), calculate the expected return% of your portfolio if you invest 50% in both Stock A and Stock B. (ii) You know the correlation coefficient of Stock A and stock B is -0.4. If you invest 50% in both Stock A & Stock B, calculate the standard deviation of your portfolio based on the standard deviation of Stock A and Stock B in (a). (iii) What does the result in (ii) tell you about the benefit of diversification? You are considering to invest in Stock A and Stock B. The expected returns% of the stocks under different economic conditions are as follows: Probability Stock A return% Stock B return% Bear Market Normal Market 0.2 -40% 20% 0.5 20% 10% Bull Market 0.3 50% -25% (a) Calculate the expected returns% and standard deviation of Stock A and Stock B respectively. (b) (i) Based on your answer in (a), calculate the expected return% of your portfolio if you invest 50% in both Stock A and Stock B. (ii) You know the correlation coefficient of Stock A and stock B is -0.4. If you invest 50% in both Stock A & Stock B, calculate the standard deviation of your portfolio based on the standard deviation of Stock A and Stock B in (a). (iii) What does the result in (ii) tell you about the benefit of diversification?

Answer rating: 100% (QA)

a Expected returns of Stock A 02 x 40 05 x 20 03 x 50 20 Expected returns of Stock B 02 x 20 05 x ... View the full answer