Question

The economics cell of Radiant Securities has developed the probability
distribution for the state of the economy and the equity researchers of Radiant
Securities have estimated the rates of return under each state of the economy. .
You have gathered the following Information from them:
Returns on Alternative Investments
State of the Probability T-Billab Stock A Stock B Stock Market
B
Economy
Portfolio
Recession
0.2
6.0% (15.0%) 30.0% (5.0%) (10.0%)
.
Normat
6.0 20.0 5.0 15.0 16.0
• Boom
0.3 6.0 40.0 (15.0) 25.0
30.0
Your client is a very curious investor who has heard a lot relating to portfolio theory
and asset pricing theory. He requests you to answer the following questions:
a) What is the expected return and the standard deviation of retum for stocks A, B,
Cand the market portfolio ?
b) What is the covariance between the retums on A and B ? Returns on A and C?
c) What is the coefficient of correlation between the returns on A and B ?
Returns on A and C ?
d) What is the expected return and standard deviation on a portfolio in which
stocks A and B are equally weighted ? In which the weights assigned to
Vstocks A, B and Care 0.4, 0.4 and 0.2 respectively?
2
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Answer 1

Answer:

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