Question

14 Based on the following data; 15 State of the Economy Rate of Return 16 Probablility Stock A Rate of Return Stock 6 % 17 Recession 0.2 20% 12%% Normal Growth 0.65 20% 18 50% 0.15 16% 19 Boom 20 calculate the expected return and the standard deviation of returns for each stock. 21 22 b) calculate the expected return and the standard deviation on the portfolio, where the portfolio is formed by investing 50% of the funds in Stock A and the rest in Stock B.

Please do problem using excel

Answer 1

a)

=A2-$C$6 D2 A B C F Stock A Probability Expecte return 1 Returns (r) [(P(r) [rxP(r)H (r-H)^2 P(r)x(r-H)^2 r-u 6% 1.20% 2 0.20 -5,40% 0.002916 0.000583 0.60% 12% 7.80% 3 0.65 0.000036 0.000023 2.40% 16% 4.60% 4 0.15 0.002116 0.000317 5 Expected return 11.40% 6 Variance (o^2) 0.00092 7 |Standard deviation (a) 3.04% 8 Stock B Probability Expecte return [(P(r)] [rxP(r)= u] 10 Returns (r) (r-u)^2 P(r)x(r-HA2 r-u -20% -4.00% 13.32% 2.66% 11 0.20 -36.50% 20% 13.00% 3.50% 0.12% 0.08% 12 0.65 50% 7.50% 33.50% 11.22% 1.68% 13 0.15 14 15 Expected return 16.50% Variance (oA2) 16 0.044275 Standard deviation (o) 21.04% 17 co et LC

b)

=F38-$H$42 138 A B C D E G H J K Expected portfolio Weighted returns if Expecte State of Rate of returns if Probability state occurs return [rxP(r) H 36 economy return (r) (WeightxReturn) [(P(r)] (r-)^2 P(r)x(r-H)^2 state occurs r-u Stock A Stock B Stock A Stock B 37 38 Strong 3.00%-10.00% -1.40%-20.95% -20% 4.39% 6% -7.00% 0.20 0.00878 39 Normal 10.40% 12% 20% 6.00% 10.00% 16.00% 2.05% 0.04% 0.65 0.00027 40 Weak 16% 50% 8.00% 25.00% 33.00% 4.95% 19.05% 3.63% 0.15 0.00544 41 Portfolio Expected return (u) 13.95% 42 Weights 50% 50% Variance (a2) 43 0.01449 Standard deviation (o) 12.04% 44 Co ...