You live in a world where there are two assets (Asset A and Asset B) and there
Question:
You live in a world where there are two assets (Asset A and Asset B) and there are two states of nature ("Rain" and "Shine"). You are told that "Shine" and "Rain" will occur with probability 0.7 and 0.3 each. Below are the returns on the asset under each state of nature
"Shine" "Rain"
Asset A 20% -8%
Asset B 8%4%
(a)Calculate the Expected Return and Standard Deviation of Returns for each Asset.
E(RA) = ________________ StDev (RA) =___________________
E(RB) = ________________ StDev (RB) =___________________
(b)Assume that you invest $800 in Asset A and $1200 in Asset B, what will be the Expected Return and Standard Deviation of Returns for the resulting portfolio?
E(RP) = ________________ StDev (RP) =___________________
An Introduction to the Mathematics of Financial Derivatives
ISBN: 978-0123846822
3rd edition
Authors: Ali Hirsa, Salih N. Neftci