Stock returns in different market conditions are given in th

Stock returns in different market conditions are given in the table. Suppose that a Bear market occurs 20% of the time, normal markets occur 50% of the time, and Bull markets occur 30% of the time. Find the expected return and standard deviation of stock X Find the expected return and standard deviation of stock Y. Find the expected return and standard deviation of the portfolio holding {X and 3/4 Y.

Solution

a) expected return 2.3{ (-4*0.2)+(2*0.5) +(7*0.3)} = -0.8+1+2.1 = 2.3

Standard deviation = 3.82

b) Expected return 10.2 {(-6*0.2)+(12*0.5)+(18*0.3) = -1.2+6+5.4=10.2

Standard deviation = 8.51

c) 1/4(2.3)+3/4(10.2) = 0.56+7.65 = 8.26