The probability distribution and expected return on Stock X and Y are provided below: State of economy Probability Return on stock Return on stock…
BBS Fundamentals of Investment · 2077 · Solved Question with Answer
The probability distribution and expected return on Stock X and Y are provided below:
| State of economy | Probability | Return on stock | Return on stock |
| Stock X | Stock Y | ||
| 1 | 0.30 | -10% | 20% |
| 2 | 0.40 | 5 | 10 |
| 3 | 0.30 | 15 | 5 |
Assume that an investor has Rs. 1 million to invest, which he invests dividing equally in Stock X and Y.
a. What are the expected returns, variances and standard deviations of each stock?
b. What is the correlation coefficient between returns from Stock X and Y?
c. Can you diversify the risk forming portfolio of these two stocks? Explain.
d. What are the portfolio return, variance and standard deviation of the portfolio?