The following table represents information about three stocks:

(2 marks)

Return of Stock C under different state of nature

-25% 20% 10% 11%

(6 marks) (6 marks) (3 marks) (2 marks)

State of Nature

Probability of State of Nature

0.3 0.4 0.2 0.1

Return of Stock A under different state of nature

20% -10% 5% 30%

Return of Stock B under different state of nature

25% 20% 10% -25%

Boom Normal Recession Recovery

(i) What is the expected return on each stock?

(ii)What is the standard deviation of returns for each stock?

(iii) What is the coefficient of variation for each stock?

(iv)Which stock is more volatile? Why?

Suppose you use JMD$2,000,000 to construct a portfolio comprising of stocks A, B and C such that you invest $600,000 in stock A, $900,000 in stock B and the remainder in stock C. Also you have done some research and estimated the Beta (b) of the stocks to be: stock A = 0.50, stock B = 0.80 and stock C = 0.25.

Using the expected returns calculated for each stock in part (b) above, calculate the following:

(i) The expected return on the portfolio (4 marks)

(ii) The expected beta of the portfolio