Assume you have created a 2-stock portfolio by investing $30,000 in stock X with a beta of 0.8, and $70,000 in stock Y with a beta of 1.2. Market risk premium is 8% and risk-free rate is 6%.The followings are the probability distributions of Stocks X and Y’s future returns:
State of Economy Probability rx ry
Recession 0.1 -10% -35%
Below average 0.2 2% 0
Average 0.4 12% 20%
Above average 0.2 20% 25%
Boom 0.1 38% 45%
What is the return you require to earn on your portfolio?
What is the return you expect to earn on your portfolio?
Calculate the standard deviation of your portfolio's return
Do you hold any under-valued stock in your portfolio? Explain.