Consider the following probability distribution and returns of stock Alpha and stock Beta State of Economy Probability Return of stock Alpha (%)…
BBS Fundamentals of Investment · 2082 · Solved Question with Answer
Consider the following probability distribution and returns of stock Alpha and stock Beta
| State of Economy | Probability | Return of stock Alpha (%) | Return of stock Beta (%) |
| First | 0.30 | 10 | 25 |
| Second | 0.40 | 20 | 20 |
| Third | 0.30 | 30 | 15 |
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a. What are the expected returns and standard deviations of Stock Alpha and Stock Beta?
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b. Which stock would you prefer to invest? Why?
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c. Calculate correlation coefficient between returns of stock Alpha and Beta.
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d. If you form a portfolio with investment of your 70 percent funds in stock Alpha and 30 percent funds in stock Beta, calculate the expected portfolio return and risk.
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e. Suppose risk-free rate is 6 percent, you form a new portfolio investing your 20 percent fund in risk-free assets and 80 percent funds in portfolio constructed in part (d), what would be expected portfolio return and risk in your new portfolio?