Describe the relationship between risk and return
Question (1):
Assume a two-stock portfolio with $40,000 invested in company X and $60,000 invested in company Z.
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Estimated Return
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Economy
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Probability
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X(ri)
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Z(ri)
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Portfolio(ri)
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Strong
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0.30
|
15%
|
25%
|
12%
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Normal
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0.50
|
10%
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13%
|
10%
|
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Weak
|
0.20
|
-8%
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-15%
|
-7%
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Total
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1.00
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1. Calculate the expected rate of return for each stock separately.
2. Calculate the expected rate of return for the portfolio.
3. Calculate the standard deviation (s) of returns for each stock separately.
4. Calculate the standard deviation (s) of returns for the portfolio.
5. Was investing in the previous portfolio helpful to decrease the risk of investing in each stock separately? Explain.