Question

PLEASE SHOW ALL WORK ON PAPER (so I can understand steps)

Problem 3: You have 50,000 dollars that you plan to invest in a portfolio with two stocks, A and B. The price of stock A is currently $20. You expect that the stock price will be: A) $60 if the economy is booming (which could happen with probability 25%), B) $25 if the economy continues at its current state (which could happen with probability 40%) C) $5 if the economy is in recession (which could happen with probability 35%) The price of stock B is currently $40. You expect that the stock price will be: A) $47 if the economy is booming (which could happen with probability 25%), $43 if the economy continues at its current state (which could happen with probability 40%) C) $39 if the economy is in recession (which could happen with probability 35%) Calculate the following: i) Find the expected return, standard deviation, and coefficient of variation for stocks A and B

Answer 1

Expected return value o diesel Enfected return from a security Rsece. E (robability Xi Return) @ Ban Expected return from Stock-A. Situalion Expected curred Return rebum. Probabilita future Price in & in % in decimals Price @ _ ak100 $60 $20 / $40 2001. 0.25 LA | $25 $5 $20 $5 | 25-1. $20 ($15) 16354) 0.40 0.35 C Expected return from Stock-AV = (200% X0:25) + (25%. X 0:40) +|( 1.) X0.35 RA = 33.75% ② Expected return from Hock-B. situation Expected Current Return/ Return probabilita I price. [price. in $ in % in decimals A $47._$40 $7_17.54._0.25 B $43_$40 $3L754|0:40 c $39_540_$1) |(2.541_0.35

Expected return from stock - B RB = (17.54 X0:25)+(7:57, X0.4) + ((2:57.)x0.39 :3 (4:3954.) +(37.) -(0.875v.) 1 Rg = 6:54 = nired | 2 Standard deviation of a security o sec = E Probability (R-8). OA- 10.25 x (200% -33.757) + 10.40 x (254. –33.754)2+ 10.35 X6-7.54.–33.352)2 ccato #@_0031 Rosas 6909.7656 +30.6250+595.5469 oĀ = 86.81%

OB= 0.25 x ( 17.54. - 6.57. ). 0.40 XC7. SY - 6. 5.) V0.35% (-2.5). - 6.54.) OB30.25 +0.40+ 28.35 OB=7.68% of of a stock stock. ② Cooefficient of variation - Standard deviation - Expected return sec - Rsec. stock - A Coefficient of variance of - 86.817. 33-757 __ = 2.57 times Co-efficient of variance of stock - B = 7.68% - 6.5%. _=1:18 times
Expected return from

Stock -A =33.75%

Stock -B = 6.5%

Standard deviation of

Stock -A = 86.81%

Stock -B = 7.68%

Coefficient of variation of

Stock -A = 2.57

Stock -B = 1.18