Standard deviation for each security

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Reference no: EM13199717

1. Suppose that you have the following data on states of nature and outcomes for three securities:

State Prob. R_A R_M R_F

I 0.6 14% 12% 4%

II 0.4 -2% 3% 4%

Find the expected return and standard deviation for each security.
Find the covariance between A and M. Then, find the correlation between A and M.
Given the correlation between A and M, is it useful to form a portfolio using these two assets? Explain.
Form a portfolio by allocating 40% of your wealth to A and the remainder to M. Compute the expected return and standard deviation of this portfolio. Compare the standard deviation to a weighted average standard deviation for A and M. Explain why the portfolio standard deviation is either the same as or lower than the weighted average standard deviation.

2. What is a "real option" and how does it relate to capital budgeting and the objective of the firm?

Reference no: EM13199717

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