D Question 6 4 pts Consider the following stock return scenarios for three stock

Question

D Question 6 4 pts Consider the following stock return scenarios for three stocks Economy Stock A Stock B Stock C Up 8% 2% 12% Average 5% 3% 0% Down 0% 4% -5% If each state of the economy is equally likely, calculate the expected return and population standard deviation for a portfolio invested entirely in Stock A. Which stock should be added to the portfolia to reduce risk? expected return 4.33%; standard deviation 3.30%; add stock B expected return 5.00%; standard deviation 3.30%; add stock C expected return 5.00%; standard deviation 2.00%; add stock C expected return 4.33%; standard deviation 2.00%; add stock B

Explanation / Answer

The answer is first option Expected return 4.33%, standard deviation 3.3% add stock B

Expexted return = Sum of (Probabilty x out come)

= 8% x 1/3 + 5% x 1/3 +0% x 1/3 (Or you van take simple average in this case)

= 4.33%

Standar deviation

M = 4.33%

Standard deivation = 3.3 % (Root of 10.89)

Expected return of B = 3% (Simple average)

standard deviation of B = Root of (2-3)2 /3+ (3-3)2/3 + (4-3)2 /3= .33+0+.33 = ..812

Expected return of C = 2.33%

Standard deviation = Root of (12-2.33)2/3+ (2.33)2/3+ (7.33)2/3= 31.17+1.81+17.91 = 7.13%

Stock B gives Highest return than C with lowest risk  

Return d=R-M d2 p p x d 2 8 3.67 13.4689 1/3 4.49 5 .67 .4489 1/3 .15 0 -4.33 18.7489 1/3 6.25 Total 10.89

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.