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Compute the expected return and standard deviation

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Reference no: EM132709841

You are a portfolio manager of a fund. Your firm's securities analysts have made the following forecasts on a portfolio of stocks (S) and a portfolio of corporate bonds (B).

Bear market Normal market Bull market

Probability 0.2 0.6 0.2

Stocks (S) -10% 15% 30%

Bonds (B) 4% 7% -10%

-Compute the expected return and standard deviation of a portfolio with 60% in stocks (S) and 40% in bonds (B) (denote this Portfolio C).

-Draw the efficient frontier and show Portfolio C, stocks (S), and bonds (B), in the graph, given all the information and computations (expected return and standard deviation for S, B, & C) you have obtained from part a) above. You must label everything correctly for full credit.

-Explain to your client, who is an individual investor, how his/her optimal risky portfolio is determined in this capital market where there are only these two risky assets, stocks and bonds, with the aid of a graph. (Note: A correct graph with all correct labels without explanation will earn xx points.)

Reference no: EM132709841

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