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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 Summary

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

Solution Preview

See the attached Excel file for all calculations.

The formulas we use are ...

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