1(a) .There are three stocks. Each stock price is $10 per share. You have $30,so you can buy 3 shares. Each stock will go down to $8 with 50% probability or up to $14 with 50% probability. The stock returns are independent. Note this is exactly the same as flipping three coins. There are eight possible outcomes. For example, one is all three stocks go up and another is the first two go up and the third goes down. Please report payoffs in dollars and returns in percentage.
If you place all the money in one stock, what is your expected return and variance?
(B) using the information in problem 1(a), if u place $10 in each stock what payoffs and returns are possible?
(C) calculate the variance of the portfolio with $10 in each stock. Did u expect this to be more or less than the variance calculated in problem 1a?
(D) if these three stocks constitute the market, what is the beta( the symbol look like B) of stock 1?