Problem: Reconsider the Best Candy and Sugar Beet stock market hedging. Assume that the probability distribution of the rate of return on Best Candy stock is unchanged but for Sugar Beet stock, it becomes the following:
See table for data
Q1. If Humanex's portfolio is half Best Candy stock and half Sugar Beet, what are its expected return and standard deviation? Calculate the standard deviation from the portfolio returns in each scenario?
Q2. What is the covariance between Best Candy and Sugar Beet?
Q3. Calculate the portfolio standard deviation using Rule 5.
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Normal Year for Sugar
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Abnormal Year
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Bullish Stock Market
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Bearish Stock Market
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Sugar Crisis
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Probability
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0.5
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0.3
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0.2
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Best Candy
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Rate of return
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0.25
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0.10
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-0.25
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Sugar Beet
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Rate of return
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0.10
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-0.05
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0.20
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