(а) Donald is considering the merits of two securities. He is interested in the common shares of A Co. and B Inc. The expected monthly rate of return of securities is shown below: State of Affair Probability Stock A Stock B Вoom 0.1 40% -20% Normal 0.5 20% 8% Recession 0.4 -10% 15% At the time of purchase, the market value is $70/share for A and $50/share for B. Donald plans to invest 10,000 shares of Stock A and 6,000 shares in Stock B.
(а) Donald is considering the merits of two securities. He is interested in the common shares of A Co. and B Inc. The expected monthly rate of return of securities is shown below: State of Affair Probability Stock A Stock B Вoom 0.1 40% -20% Normal 0.5 20% 8% Recession 0.4 -10% 15% At the time of purchase, the market value is $70/share for A and $50/share for B. Donald plans to invest 10,000 shares of Stock A and 6,000 shares in Stock B.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Assume that the covariance between Stock A and Stock B is -28%^2 (0.0028). Compute the expected
rate of return and variance of rate of return of Donald’s portfolio.
Transcribed Image Text:(а)
Donald is considering the merits of two securities. He is interested in the common shares of
A Co. and B Inc. The expected monthly rate of return of securities is shown below:
State of Affair
Probability
Stock A
Stock B
Вoom
0.1
40%
-20%
Normal
0.5
20%
8%
Recession
0.4
-10%
15%
At the time of purchase, the market value is $70/share for A and $50/share for B. Donald
plans to invest 10,000 shares of Stock A and 6,000 shares in Stock B.
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