Reference no: EM132063932

The Lubin’s Investment Team is considering investmenting in two securities, A and B, and the relevant information is given below: State of the economy Probability Return on A(%) Return on B(%) Trough 0.05 -20% 2% Recession 0.4 -10% 2% Expansion 0.5 15% 2% Peak 0.05 20% 2% Calculate the expected return and standard deviation of two securities. State of the Economy Probability Return on A (%) p*r r – E(r ) = d d^2 p*d^2 Trough 0.05 -0.20 -0.010 -0.235 0.05522 0.002761 Recession 0.40 -0.10 -0.040 -0.135 0.01822 0.007290 Expansion 0.50 0.15 0.075 0.115 0.01322 0.006613 Peak 0.05 0.20 0.010 0.165 0.02722 0.001361 Expected return: ?(p*r): 3.5% 0.035 0.018025 Standard deviation: =??(p*d^2)?^(1/2) =?0.018025?^(1/2) 13.43% State of the economy Probability Return on B(%) p*r r-E[r] =d d^2 p*d^2 Trough 0.050 0.02 0.001 0 0 0 Recession 0.400 0.02 0.008 0 0 0 Expansion 0.500 0.02 0.010 0 0 0 Peak 0.050 0.02 0.001 0 0 0 Expected Return: ?(p*r): 2.00% 0.02 0 Standard deviation: ??(p*d^2)?^(1/2): 0 Suppose the Team invested $7000 in security A and $3,000 in security B. Calculate the expected return and standard deviation of the Team’s portfolio. Expected return: (3.5*0.7) + (2*0.3) = 3.05% Standard deviation = 3.5 * 0.7 = 2.45% Problem 3 Continue to work with the data from Problem 2, but now assume that the Lubin’s Investment Team from Problem 2 decided to alter its portfolio. They want to short $5000 worth of security B and invest all of their own money plus all the proceeds from the short sale of security B into security A. What are the weights of securities A and B in the altered portfolio? What is the expected return on this new portfolio? What is its standard deviation? Please comment on the risk-return effect that the short position has on the portfolio.