Stock A is expected to return 14 percent in a normal economy and lose 21 percent in a recession.Stock B deals with inferior goods and has expected returns of 6 percent in a normal economy and 15 percent in a recession.The probability of a recession occurring is 25 percent with a zero probability of a boom.What is the standard deviation of a portfolio that is equally weighted between the two stocks?
A)5.63%
B)6.08%
C)4.29%
D)5.13%
E)6.36%

Question

Quizplus · Accepted Answer

E(r)_Normal = 0.50(0.14)+ 0.50(0.06)= 0.10 E(r)_Bust = 0.50(−0.21)] + 0.50(0.15)= −0.03 E(r)_Portfolio = 0.75(.10)+ 0.25(−0.03)= 0.0675 σ_Portfolio = {0.75[(0.10 − 0.0675)²] + 0.25[(−0.03 − 0.0675)²]}^0.5 = 0.0563,or 5.63%

Stock a Is Expected to Return 14 Percent in a Normal