Problem:
You have a portfolio worth $50,000 consisting of two stocks, A and B. You invested $20,000 in stock A. Consider the following information:
| State of economy |
Probability |
Return on A |
Return on B |
| Growth |
.30 |
10% |
20% |
| Normal |
.5 |
15% |
4% |
| Recession |
.2 |
-12% |
0% |
Required:
Question 1: What is the expected return for A? for B?
Question 2: What is the standard deviation for A? for B?
Question 3: What is the expected return and standard deviation for the portfolio?
Question 4: What is the correlation between A and B? are there benefits to forming a portfolio of these two securities?