Question: You have estimated the returns of 2 companies for the next year depending on the general economic condition.
|
Outcome
|
Probability
|
Company 1
|
Company 2
|
|
Boom
|
30%
|
15%
|
5%
|
|
Normal
|
50%
|
5%
|
0
|
|
Recession
|
20%
|
0%
|
10%
|
(a) Calculate the expected return and standard deviation of the returns of each company.
(b) Calculate the covariance and correlation between the returns of these 2 companies.
(c) Let's combine these 2 companies 50%-50% in portfolio P. Calculate the expected return and the standard deviation of the portfolio P.
(d) Using mean-variance criterion, does any of the 3 investments, company 1, company 2, and portfolio P, dominate the other one?