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investing your money in the stock market

You are thinking about investing your money in the stock market. You have the following two stocks in mind: stock A and stock B. You know that the economy can either go in recession or it will boom. Being an optimistic investor, you believe the likelihood of observing an economic boom is two times as high as observing an economic depression. You also know the following about your two stocks:

State of the Economy

Probability

RA

RB

Boom


10%

–2%

Recession


6%

40%

a) Calculate the expected return for stock A and stock B

 b) Calculate the total risk (variance and standard deviation) for stock A

and for stock B

 c) Calculate the expected return on a portfolio consisting of equal

proportions in both stocks.

 d) Calculate the expected return on a portfolio consisting of 10%

invested in stock A and the remainder in stock B.

 e) Calculate the covariance between stock A and stock B.

 f) Calculate the correlation coefficient between stock A and stock B.

 g) Calculate the variance of the portfolio under the above two

portfolio combinations.



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