Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the covariance and correlation between the returns of the two stocks? Calculate the portfolio return and portfolio standard deviation if a. you invest equally in each asset. Retums State of Economy Prob J K Recession 0.25 -0.02 0.034 Normal 0.6 0.138 0.062 Boom 0.15 0.218 0.092

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
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a. Based on the following information, calculate the expected return and standard deviation for
each of the following stocks. What are the covariance and correlation between the returns of
the two stocks? Calculate the portfolio returm and portfolio standard deviation if you invest
equally in each asset.
Returns
State of Economy
Prob
J
K
Recession
0.25
-0.02
0.034
Normal
0.6
0.138
0.062
Boom
0.15
0.218
0.092
b. A portfolio that combines the risk-free asset and the market portfolio has an expected return of
percent and a standard deviation of 10 percent. The risk-free rate is 4 percent, and the
Page 7 of 33
expected return on the market portfolio is 12 percent. Assume the capital asset pricing model
holds. What expected rate of return would a security earn if it had a 45 corelation with the
market portfolio and a standard deviation of 55 percent?
C. Suppose the risk-free rate is 4.2 percent and the market portfolıo has an expected return of 10.9
mercent Tibemadkat normfeliobasiabiamance of 0382 Potfolig 71
Transcribed Image Text:a. Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the covariance and correlation between the returns of the two stocks? Calculate the portfolio returm and portfolio standard deviation if you invest equally in each asset. Returns State of Economy Prob J K Recession 0.25 -0.02 0.034 Normal 0.6 0.138 0.062 Boom 0.15 0.218 0.092 b. A portfolio that combines the risk-free asset and the market portfolio has an expected return of percent and a standard deviation of 10 percent. The risk-free rate is 4 percent, and the Page 7 of 33 expected return on the market portfolio is 12 percent. Assume the capital asset pricing model holds. What expected rate of return would a security earn if it had a 45 corelation with the market portfolio and a standard deviation of 55 percent? C. Suppose the risk-free rate is 4.2 percent and the market portfolıo has an expected return of 10.9 mercent Tibemadkat normfeliobasiabiamance of 0382 Potfolig 71
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