Overall economic condition affect return of common stocks. suppose a financial analyst believes that four states of the national economy are possible and each state has an equal probability of occurrence. The estimate returns of two stocks GM and IBM under these four states of economy are presented in the following table.
state of economy. return of gm. return of ibm
negative real growth. -11% -3%
zero economic growth. 4. 17
modest real growth. 9. 21
high economic growth. 28. 23
1. calculate the expected return of these two stocks.
2. calculate the standard deviation of return of these two stocks.
3. calculate the correlation off gm and IBM
4. determine the expected return and standard deviation of return of the following portfolio: 70% invested in gm and 30% in ibm.