# Expected Return and Standard Deviation of Return 1) You are interested in investing, and are conside

Expected Return and Standard Deviation of Return

1) You are interested in investing, and are considering a
portfolio comprised of the following two stocks Their estimated returns under
varying market conditions are provided:

Condition Probability
of condition Return on security A Return on security B

Economy Sluggish 03 016 -005

Economy Normal 04 006 01

Economy Booms 03 -002 021

a) What is the expected return for security A?

b) What is the expected return for security B?

c) What is the standard deviation for Security A?

d) What is the standard deviation for Security B?

2) Now that you have calculated the standard deviations of A
and B, assuming an equally weighted portfolio of each, calculate the
correlation coefficient of the two stocks and use that calculation to discuss
the appropriateness of holding the stocks together in a single portfolio
(hint: you must use your answers above to first calculate the covariance)

Now that you have calculated the standard deviations of A
and B, assuming an equally weighted portfolio of each, calculate the
correlation coefficient of the two stocks and use that calculation to discuss
the appropriateness of holding the stocks together in a single portfolio
(hint: you must use your answers above to first calculate the covariance) 