Expected Returns and Standard Deviations for Two Stocks
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Two Stocks, X and Y, have three states of nature based on the state of the economy:
State of Economy Probability Stock X Return Stock Y Return
Recession 0.10 -0.20 0.30
Normal 0.60 0.10 0.20
Boom 0.30 0.70 0.50
1. What are the expected returns and standard deviations for these two stocks?
2. Suppose you have $20,000 total. If you put $6,000 in X and the remainder in Y,
what will be the expected return and standard deviation on your portfolio be?
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1. What are the expected returns and standard deviations for these two stocks?
kX = 0.1 x (-20) + 0.6 x 10 + 0.3 x 70 = 25 %
kY = 30%
St. Dev X = [(20 - 25)2 + x 0.10 + (10 - 25)2 + x ...
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