You are given the following probability distribution of alternative rate of return associated with three investment alternatives along with their…
BBS Fundamentals of Investment · 2078 · Solved Question with Answer
You are given the following probability distribution of alternative rate of return associated with three investment alternatives along with their beta coefficient.
| Percentage return | ||||
| State of economy | Probability | Equity Fund A | Stock B |
Certificate of deposit, C
|
| Recession | 0.2 | 8% | 6% | 7% |
| Normal | 0.3 | 10 | 12 | 7 |
| Boom | 0.5 | 12 | 15 | 7 |
| Beta | 1 | 1.2 | 0 |
a. Which alternative provides highest expected return?
b. Which alternative is the least risky in terms of standard deviation? Which alternative is the most risky in terms of beta?
c. Suppose you created two portfolios—portfolio X and portfolio Y. Portfolio X consists of 75 percent investment in Equity Fund A and 25 percent investment in Stock B. Portfolio Y consists of equal investment in Stock B and Certificate of Deposit C. Which portfolio is least risky in terms of (i) standard deviation, and (ii) beta?