Question

Based on the following information, please answer the question.

State of Economy	Probability	Stock ABC’s return	Stock XYZ’s return
Boom	20%	35%	0%
Recession	80%	10%	10%

If you form a portfolio by investing 70% of your money in Stock ABC and 30% money in stock XYZ, what are the expected return and standard deviation of your portfolio?

Group of answer choices

E(RP)=20.2% ; P=9.32%.

E(RP)=12.9% ; P=9.83%.

E(RP)=12.9% ; P=5.80%.

E(RP)=15.5% ; P=7.76%.

E(RP)=20.2% ; P=6.64%.

Answer 1

Ans: 12.9% and 5.8%

Expected Return and Standard deviatio of stocka ECO Boom Recession PRob 207 80% RA 35% 10% ē SPRACRA (R-8) EPCR-R32 71 20 80 8% -5 20 is 100 Expected Retur = 15% Standard deviatio - JR-OJE VIOO -10. Expected return and standard deviation of Stock B: I Boom Recessio PRob 20% 8o4. Rx 0% 101. Rx= EPRA 0 8 8% (RM-R) SP (Ra-Ra) 2 - 8 12.8 2 3.2 16 Expected Return = 8 % Standard deviation = 16:47 Covariance - 20 CRN-R2) - 8 EPCRR) (x-7) -32 20% 80% -8 2 -5 - yo Portfolio Return WA RAt Warn 0 AC C 00 1 4 70% (15%) + 30% (8%) = 12.9% Standardevianti wn <2 + why y² + 2 Covcx,y) IMx way (0.701032+ (0-332432+ a (-40) (0-4) (0-3) 49+ 1.44 - 16-8 2580-74 • 2 5 I wou