You have invested in stock A and B. There are two states of economy, the recession and the boom. The probability of the recession is 60%.
Economic state Return A Return B
Boom 40% 10%
Recession 5% 20%
(a) Calculate the expected return for stock A and B.
(b) Calculate the standard deviation of stock A and B.
(c) Calculate the correlation between stock A and B.
(d) Calculate the standard deviation of a portfolio where ¼ of your money is invested in stock A and the remainder in stock B.
(e) Calculate the standard deviation of a portfolio with equal weights in the risky assets.
My answer for a is E(R) = 0.19 or 19% and E(R) = 0.16 or 16%
b is 0.1715 or 17.15% and 0.4899 or 4.9%
c is - 0.1266
However, I am stuck for par D and E. Can you help please.
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AFMRisk and return
Portfolio theory calculations are no longer in the syllabus for Paper P4 and have not been for some time!
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