Stocks Intel and GE have the following probability distributions of expected fut

Question

Stocks Intel and GE have the following probability distributions of expected future returns:

Compute the expected rate of returns for Intel and GE.

a. 12.20%; 10.00%

b. 16.10%; 9.40%

c. 11.10%; 8.00%

d. 12.00%; 12.00%

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Refer to information provided in Question#1:

Compute the risks of holding Intel and GE.

a. 3.39%; 0.92%

b. 8.35%; 1.92%

c. 6.54%; 0.50%

d. 8.95%; 1.27%

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Refer to information provided in Question#1:

Compute the Coefficient of Variations for Intel and GE.

a. 1.89; 1.35

b. 1.21; 1.89

c. 0.89; 0.35

d. 0.21; 0.10

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Refer to information provided in Question#1:

Construct a portfolio where 60% is invested in Intel and 40% in GE and compute the expected rate of return for the portfolio.

a. 12.43%

b. 13.42%

c. 10.48%

d. 11.57%

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Refer to information provided in Question#1:

Compute the covariance of the two return series.

a. 255.89

b. 3.25

c. 2.46

d. 292.35

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Refer to information provided in Question#1:

Compute the correlation coefficient of the two return series.

a. 0.79

b. 0.99

c. -0.99

d. -0.89

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Refer to information provided in Question#1:

Compute the risk of the portfolio.

a. 5.89%

b. 6.32%

c. 6.89%

d. 2.34%

RET URNS Period Probability Intel GE Boom 0.4 20 10 Normal 0.3 15 10 Recession 0.3 12 8

Explanation / Answer

Expected Returns:
Intel: 0.4*20+0.3*15+0.3*12=16.1%
GE: 0.4*10+0.3*10+0.3*8=9.4%

Standard deviation or risk
Intel: sqrt(0.4*(20-16.1)^2+0.3*(15-16.1)^2+0.3*(12-16.1)^2)=3.38969% or 3.39%
GE: sqrt(0.4*(10-9.4)^2+0.3*(10-9.4)^2+0.3*(8-9.4)^2)=0.916515% or 0.92%

Coefficient of Variation=Standard Devaition/Mean or Expected Returns
Intel:3.38969%/16.1%=0.21054 or 0.21
GE: 0.916515%/9.4%=0.0975 or 0.10

Expected return:
Portfolio: 0.6*16.1%+0.4*9.4%=13.42%

Covariance of returns
=0.4*(20-16.1)*(10-9.4)+0.3*(15-16.1)*(10-9.4)+0.3*(12-16.1)*(8-9.4)=2.46%^2

Correlation coefficient
=covariance/(Standard Deviation of Intel*Standard Deviation of GE)
=2.46/(3.39*0.92)
=0.788 or 0.79

Standard deviation or risk of Portfolio=sqrt(Weight of Intel^2*Standard Devaition of Intel^2+Weight of GE^2*Standard Devaition of GE^2+2*weight of Intel*weight of GE*Covariance)

=sqrt(60%^2*3.39%^2+40%^2*0.92%^2+2*60%*40%*2.46%%)

=2.335% or 2.34%

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