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    Expected Return and Standard Deviation of Returns on Stocks

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    State of the economy Probability End of Period Return
    Stock A Stock B

    Good 0.3 20% 21%
    Average 0.5 16% 15%
    Bad 0.2 11% 7%

    1- What are the expected return and standard deviation of the returns on stocks A and B?
    2- What is the expected return and standard deviation of a portfolio of 20% in A and 80% in B?
    3- What is the expected return and standard deviation of a portfolio with 80% in A 4- Which one of the two portfolios should be selected by a risk averse investor? Why?

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    Solution Preview

    See the attached Excel file for all calculations.

    The formulas we use are ...

    Solution Summary

    This solution shows the steps for determining the expected return and standard deviation of the return on a pair of stocks and portfolios.

    $2.19

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