Ms. Alice has reached out to you, seeking advice and further feedback regarding her plan to invest
Question:
Ms. Alice has reached out to you, seeking advice and further feedback regarding her plan to invest in the stocks of 3 different companies in IDX. These have been labeled as Stock A, Stock B, and Stock C. Below is the probability distribution table of stock returns that has been prepared for the three afore mentioned Stocks.
| Condition | Probability | Stock Return | ||
| A | B | C | ||
| Boom | 0.40 | 30% | 45% | -9% |
| Normal | 0.30 | 10% | 15% | 40% |
| Recession | 0.30 | -1% | 2% | 50% |
a. Calculate the Expected return and the Standard deviation of each of the three Stocks. Based on the value of the Relative risk, which Stock would you recommend Ms. Alice to invest in ?
b. If Ms. Alice wish to form 2 portfolios, first being investment portfolio AB: comprising of 50:50 composition of Stock A and Stock B; and second, investment portfolio AC: comprising of 50:50 composition of Stock A and Stock C. Assist Ms. Alice to calculate the Expected return and Standard deviation of investment portfolio AB and AC ?
c. Based on the answer you have presented for point b., which investment portfolio option should you advise Ms. Alice to invest in? Clarify and support your answer in relation to the concept of correlation and diversification of each the Stock forming the respective investment portfolio .
Expert Answer:
a To calculate the expected return and standard deviation of each stock Stock A Expected return 040 ... View the full answer
