An Investor Is Considering Purchasing Two Stocks for a Portfolio

question 73

Essay

An investor is considering purchasing two stocks for a portfolio.Both stocks will have equal weighting in the portfolio.It is expected that three economic states may occur, each with equal probability of occurring.If a boom economy transpires, stock A will yield a 20% return and stock B 10%.An average economy will see a 10% and 5% returns for stocks A and B respectively.In a bust economy, stock A will have a return of -5% and stock B 1%.Given the above information, calculate the standard deviations of each stock along with the portfolio.

---

Definitions:

Contribution Approach

An income statement format that organizes costs by their behavior. Costs are separated into variable and fixed categories rather than being separated into product and period costs for external reporting purposes.

External Reporting

The process of preparing and disclosing financial statements and other reports to entities outside of the corporation, such as investors and regulatory bodies.

Variable Cost

Costs that change in proportion to the level of production or business activity.

Unit Basis

A method of measurement or allocation in which operations or costs are expressed per single unit of production or activity.