Question
You are comparing stock A to stock B. Consider the following table: State of Economy Probability of State of Economy Rate of Return if State
You are comparing stock A to stock B. Consider the following table:
| State of Economy | Probability of State of Economy | Rate of Return if State Occurs | |
| Stock A | Stock B | ||
| Boom | 60% | 15% | 9% |
| Normal | 30% | 8% | 4% |
| Recession | 10% | -2% | -5% |
(a) What is the expected return of a portfolio which is comprised of $8,400 invested in stock A and $3,600 in stock B?
(b) What is the standard deviation of a portfolio which is comprised of $8,400 invested in stock A and $3,600 in stock B?
(c) Which one of these two stocks should you prefer to buy and why?
Step by Step Solution
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SOLUTION a To calculate the expected return of a portfolio we need to multiply the rate of return for each state of the economy by its corresponding p...
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Income Tax Fundamentals 2013
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
31st Edition
1111972516, 978-1285586618, 1285586611, 978-1285613109, 978-1111972516
