Question

PLEASE SHOW ALL WORK ON PAPER (So I can understand the steps taken)

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%), B) $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%)

Answer 1

@ in af you invest 10,000 in stock A f. 40,000 slock B. portfolic weights are as follows (WA) weight of stock A = 10,000 -) 0.2 50,000 iglit o stock B = =) 0:0 Toale 50,000 o calculation of Expected aetan ad stenckend deviation of regtfolio with weight, first we have to find out returns of stock A&B under each of state of economy then calculate after we can calculate superted return & SD of post folio. find out the returning of stock A theats current price of stock A = $20 returns probability state of economy bcoming r Pi-Pox100 Pos 0.25 60-20 x100 =900 % 25-20 x100 = 254. corrent state 0.40 0.35 Recension 5- 20x100 =-75-1. 20

expected return of stock A (RA) PRE E perbability x Setung = 0.29 X 2006. +0.40% 25%. + 0-35 X-75). => 33.767) find out the seturing of stock & current price of stock B = $40. probability P.-Pox100] state of economy y = a getums Booming 47-40x100 = 17.57. 40 0.25 current state. 43-40 x100 = 7.5% 10.40 recession in 39-40x100 = -2.54 0 .35 40 Expected seture of stock B {[3) RB = { probability & Returns = 025 *17.56% +0.40 x7,5% +0.35 -2.54 =) 6.6)

poort lolio Eupected return therefore expected Seturn of portfolio Pop - WAXTA + Wotło =) 0.2 x 33.75 +0.8* 6.5 = [11.95.72 for calculation of standard deviation of y = = = -RJ (RAL state of economy retuning Eupected IR-R I (BARA) retun cooming 200 30.765 166,25 27639.0625 33.75 -8.75 76.5625 25. current state 33.75 -75 -108.75 11,826.5625 Secession (OA) so of "A" - E probability xC RAJ? -> [0.25 x 27,639.0625]+[0.4076.5625] + [0-35* 1,826.5625] [105.2600 is

for calculation of standard deviation of stock B state of [RB] retions ] expected [BB-R] [Ro-Ro 1² conomy Setion S 121 6.5 Booming 17.5 clorrent state 7.5 1 81 6.5 1 Secession -26 6.5 -9 [0) 50 fo- Se probability x Bestaje => S [0.25x 121] + (0.40X13 +(0.36%81] There are standoid deviation of poortfolio E = WAX JA + Wotos PE : 0.2 x 105.2600 + 0.8 x 7.68 - 2285 27.1969 24 you take a decinaly - Les 27, 20