According to the analysts, the return on Company A’s stock in the coming year could be –10%, 1%, 7%, or 15%. The corresponding probabilities are 25%, 15%, 20% and 40%, respectively. In comparison, the return on Company B’s stock in the coming year could be – 5%, – 1%, 4%, or 12%. The corresponding probabilities are 10%, 30%, 20%, and 40%, respectively. Suppose we have invested 35% of our capital in A’s stock and 65% in B’s stock. Historical data suggest that the correlation coefficient between the two stocks is 0.65.
What is the standard deviation of each stock A=9.92% B=
What is the expected return on our portfolio?
What’s the standard deviation of the return on our portfolio?