You have just received an inheritance of $10,000 that you are ready to invest in the stock market. Your broker, employed by the Conseil INC. brokerage firm, strongly recommends that you purchase shares of EXL and PEP companies. For next year, the firm's analysts have made the following forecasts:

 

State of the economy (k)	Pk	EXL stock price  in a year	PEP share price in one year
1	0,15	8 $	14 $
2	0,35	10	20
3	0,30	14	26
4	0,20	18	34

 

On the stock markets, shares of EXL are currently trading at $10 per unit and those of PEP at $20 per unit. Additionally, most analysts expect each of these two companies to distribute a dividend of $0.50 per share at the end of the year.

 

What is the expected return on EXL's stock?  

What is the expected return on PEP company stock?

What is the standard deviation of EXL's stock rate of return?

 What is the standard deviation of the PEP company's stock rate of return?

What is the correlation coefficient between the stock returns of EXL and PEP companies?

 

Complete the following table :

Amount invested in EXL	Amount invested in PEP [E(R p ]	Expected portfolio return [s(R p ]	Portfolio risk
10 000 $	0 $	(1)	(2)
7 500	2 500	(3)	(4)
5 000	5 000	(5)	(6)

Answer rating: 100% (QA)

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