There are two stocks in the market stock A and Stock B. The price of Stock A to day is USD50. The price of stcok A next year will be USD 40 if the economy is in a recession, USD 55 if the economy is normal and USD 60 if the economy is expanding. The probabilities of recession, normal and expansion are 0.1, 0.8, and 0.1 respectively. Stock A pays no dividend and has a correlation of 0.8 with the market portfolio. Stock B has expected return of 9 percent a standard deviation of 12% a correlation with the market portfolio of 0.2 and correlation with stock A of 0.6. The market portfolio has a standard deviation of 10 percent. Assume the CAPM holds.
*** What are the expected return and standard deviation of a portfolio consisting of 70 percent of stock A and 30 percent of Stock B?
2007-07-12 19:50:09 · 2 answers · asked by Milon 1 in Business & Finance ➔ Investing
Assuming that both stocks cost $50, the expected return is 4.15 or 8.30%.
I'd have to do the math for the SD on the rest, but I'm sure you can plug the numbers in as well as I can into CAPM to get that right? :-)
Hope that helps check at least part of your answer.
2007-07-16 11:26:52 · answer #1 · answered by Yada Yada Yada 7 · 0⤊ 0⤋
Invest in energy companies, energy will ALWAYS be in high demand!
2007-07-12 19:57:34 · answer #2 · answered by Anonymous · 0⤊ 1⤋