You analyzed the latest economic indicators and came up with the following probability distribution for the...

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You analyzed the latest economic indicators and came up with the following probability distribution for the state of the economy next year: expansion 20%, normal growth 60%, and recession 20%. You are considering creating a portfolio with two stocks: Eren Corp and Mikasa Inc (you are going to buy 1 share of each company). Their past returns during different states of the economy are as follows: State of the economy Expansion Normal Recession Eren Corp 30% 10% -20% Mikasa Inc 20% 15% -10% The covariance between the two stocks is -0.005. Using the above information, please find the following: 1. Expected return of Eren Corp stock. 2. Standard deviation of Eren Corp Stock 3. Expected return of Mikasa Inc stock 4. Standard deviation of Mikasa Inc stock 5. Expected return of the portfolio consisting of 1 Eren Corp and 1 Mikasa Inc stock 6. Standard deviation of the above portfolio 7. Using the standard normal table, write out the expected returns on the portfolio with 68.27%, 95.45%, and 99.73% of the time. 8. Was the diversification of your portfolio successful? That is, were you able to successfully select a pair of stocks that, when combined together, create a portfolio with higher return and lower risk? You analyzed the latest economic indicators and came up with the following probability distribution for the state of the economy next year: expansion 20%, normal growth 60%, and recession 20%. You are considering creating a portfolio with two stocks: Eren Corp and Mikasa Inc (you are going to buy 1 share of each company). Their past returns during different states of the economy are as follows: State of the economy Expansion Normal Recession Eren Corp 30% 10% -20% Mikasa Inc 20% 15% -10% The covariance between the two stocks is -0.005. Using the above information, please find the following: 1. Expected return of Eren Corp stock. 2. Standard deviation of Eren Corp Stock 3. Expected return of Mikasa Inc stock 4. Standard deviation of Mikasa Inc stock 5. Expected return of the portfolio consisting of 1 Eren Corp and 1 Mikasa Inc stock 6. Standard deviation of the above portfolio 7. Using the standard normal table, write out the expected returns on the portfolio with 68.27%, 95.45%, and 99.73% of the time. 8. Was the diversification of your portfolio successful? That is, were you able to successfully select a pair of stocks that, when combined together, create a portfolio with higher return and lower risk?

Answer rating: 100% (QA)

To solve the problem well use the following variables Ee Expected return of Eren Corp stock Es Standard deviation of Eren Corp stock Me Expected retur... View the full answer