QUESTION #1

Calculating Expected Returns and std dev with Unequal Probabilities: Suppose you thought a boom would occur 20 percent of the time instead of 50 percent (So Recession probability = 1.00 0.20 = 0.80 )

1. What are the expected returns on Starcents and Jpod in this case?
2. If the risk-free rate is 10 percent, what are the risk premiums?
3. What is the standard deviation of Starcents and Jpd, respectively?

QUESTION #2

Calculating Portfolio Expected Return and Std. dev with unequal portfolio weights : With the aforementioned scenario, now you decide to invest 30% into Starcents and 70% into Jpods

1. What is the expected return of this portfolio?
2. What is the correlation coefficient between Starcents and Jpod?
3. What is the standard deviation of this portfolio?
4. How much of diversification benefit did you achieve?

QUESTION #3

1. What should be the portfolio weights for Starcents and Jpod, respectively, to achieve a Minimum-Variance Portfolio (MVP)?
2. What is the standard deviation of the Minimum-Variance Portfolio (MVP)?
3. What is the expected return of the Minimum-Variance Portfolio (MVP)?

QUESTION #4

Create a table (similar to the one attached bellow: of portfolio expected return and standard deviation by varying portfolio weights. Then, draw the investment opportunity set (either using Excel or by hand-drawing neatly) for the portfolio and identify the efficient portfolios along with the minimum-variance portfolio.

QUESTION 1 with Unequal Probabilities States of the Economy and Stock Returns Security Returns if State Occurs \begin{tabular}{lccc} State of Economy & Probability of State of Economy & Starcents & Jpod \\ Recession & & 20% & 30% \\ Boom & 1.00 & 70 & 10 \\ \hline \end{tabular} Correlation and Diversification, I. E(r) and composed of different portfolio weight combinations Correlation and Diversification