Consider the following probability distribution and returns of stock X and stock Y: Economic conditions Probability Return of stock X (%) Return of…
BBA Financial Management · 2024 · Solved Question with Answer
Consider the following probability distribution and returns of stock X and stock Y:
| Economic conditions | Probability | Return of stock X (%) | Return of stock Y (%) |
| First | 0.30 | 10 | 30 |
| Second | 0.40 | 15 | 20 |
| Third | 0.30 | 20 | 10 |
a. Calculate expected return of stock X and stock Y.
b. Estimate standard deviations of stock X and stock Y.
c. Compute the covariance and correlation between returns of stock X and stock Y.
d. If you form a portfolio with investment of your 50 percent funds in stock X and rest in stock Y, calculate the expected return and risk of your portfolio.