You are given the following data on several stocks:
|
State of the Economy
|
Probability
|
Returns in Each State of Economy
|
|
Gere Mining
|
Reubenfeld Films
|
DeLorean Automotive
|
|
Boom
|
25%
|
40%
|
24%
|
-20%
|
|
Expansion
|
50%
|
12%
|
10%
|
12%
|
|
Recession
|
25%
|
-20%
|
-12%
|
40%
|
a. Calculate the expected return and standard deviation for each stock.
b. Calculate the expected return and standard deviation for a portfolio invested equally in Gere Mining and Reubenfeld Films. How does the standard deviation of this portfolio compare to a simple 50-50 weighted average of the standard deviations of the two stocks?
c. Calculate the expected return and standard deviation for a portfolio invested equally in Gere Mining and DeLorean Automotive. How does the standard deviation of this portfolio compare to a simple 50-50 weighted average of the standard deviations of the two stocks?
d. Explain why your answers regarding the portfolio standard deviations are so different in parts (b) and (c).