Using the following information find the expected return var

Using the following information find the expected return, variance, and standard deviation of stock A and B. Also find the covariance and correlation between Stock A and B.

States

Probability

Return on Stock A

Return on Stock B

1

20.00%

26.00%

9.00%

2

30.00%

18.005

15.00%

3

50.00%

10.00%

30.00%

If you invest 10,000 in stock A and 15,000 in Stock B what would be your portfolio return and risk. Use the information from question 1 if necessary. (Please show work)

Solution

Stock A:

expected return = (26x.2)+(18x.3)+(10x.5)= 15.6%

variance=[ standard deviation^2]= (6.248^2)= 39.04

standard deviation={ [(26-15.6)^2x.2]+[(18-15.6)^2x.3]+[(10-15.6)^2x.5]}^1/2= 6.248

Stock A:

expected return = (9x.2)+(15x.3)+(30x.5)= 21.3%

Varaince=8.945^2= 80.01

standard deviation={ [(9-21.3)^2x.2]+[(15-21.3)^2x.3]+[(30-21.3)^2x.5]}^1/2= 8.945