An Investment Firm Is Considering a Portfolio with Equal Weighting

question 19

Multiple Choice

An investment firm is considering a portfolio with equal weighting in a cyclical stock and a countercyclical stock. It is expected that there will be three economic states; Good, Average and Bad, each with equal probabilities of occurrence. The cyclical stock is expected to have returns of 12%, 5% and 1% in Good, Average and Bad economies respectively. The countercyclical stock is expected to have returns of -8%, 2% and 14% in Good, Average and Bad economies respectively. Given this information, calculate portfolio standard deviation.

• A) 7.33%
• B) 6.33%
• C) 5.33%
• D) 4.33%
• E) 3.33%

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