Reference no: EM133001471

Question - Suppose you are considering investing an equal proportion of your wealth in two stocks. Stock C offers a 15% return while stock T offers a 25% return assuming a boom economy occurs for which there is a 30% chance of this occurring. If a normal state of the economy occurs, Stock C offers a 10% return while stock T offers a 20% return. There is a 50% chance of a normal economy. Finally, if a recession occurs, Stock C will offer a 2% return while stock T will offer only a 1% return. There is a 20% chance of a recessionary economy.

Required -

1. Compute the expected return on your 2-asset portfolio.

2. Compute the standard deviation of your 2-asset portfolio.

3. Now assume that in addition to holding Stocks C and T as part of your portfolio, you decide to add Stock R to your portfolio. You will again invest an equal proportion of your wealth among each stock. Using the same probabilities of state outcomes and returns previously made for Stocks C and T, recompute the expected return and standard deviation on your portfolio under the assumption that Stock R will offer a -5% return in a boom economy, a 1% return in a normal economy, and a 15% return in a recessionary economy.