You have $100,000 to invest in stocks. There are two stocks available for your i

Question

You have $100,000 to invest in stocks. There are two stocks available for your investment. The anticipated returns over the next year for a $100,000 investment have the following probability distribution:

Returns

Probability

Stock A

Stock B

.25

-$22,500

30,500

.40

10,000

25,000

.35

40,500

10,500

a. What are the expected value of returns for stocks A and B?

b. What is the standard deviation of the returns for stocks A and B?

c. What is the covariance of the two stocks?

d. What is the expected value and standard deviation of returns if you invest equally in both stocks?

e. What is the expected value and standard deviation of returns if you invest 30% in Stock A and the remainder in Stock B?

f. What is the expected value and standard deviation of returns if you invest 10% in Stock A and the remainder in Stock B?

Returns

Probability

Stock A

Stock B

.25

-$22,500

30,500

.40

10,000

25,000

.35

40,500

10,500

Explanation / Answer

You have $100,000 to invest in stocks. There are two stocks available for your i

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