Stock A will return 15 percent in a normal economy and lose 14 percent in a recession.Stock B deals with inferior goods and will return 7 percent in a normal economy and 18 percent in a recession.There is a 20 percent chance of a recession occurring.What is the standard deviation of a portfolio that is equally weighted between the two stocks?
A)3.60%
B)6.50%
C)1.30%
D).13%
E).36%

Question

Quizplus · Accepted Answer

E(r)_Normal = (.50 × .15)+ (.50 × .07)= .11E(r)_Bust = (.50 × -.14)+ (.50 × .18)= .02E(r)_Portfolio = (.80 × .11)+ (.20 × .02)= .092Var_Portfolio = [.80 × (.11 - .092)²] + [.20 × (.02 - .092)²] = .001296Std dev = √.001296 = .0360,or 3.60%

Stock a Will Return 15 Percent in a Normal Economy