(а) Donald is considering the merits of two securities. He is interested in the common shares of A Co. and B Inc. The expected monthly rate of return of securities is shown below: State of Affair Probability Stock A Stock B Вoom 0.1 40% -20% Normal 0.5 20% 8% Recession 0.4 -10% 15% At the time of purchase, the market value is $70/share for A and $50/share for B. Donald plans to invest 10,000 shares of Stock A and 6,000 shares in Stock B.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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  1. Assume that the covariance between Stock A and Stock B is -28%^2 (0.0028). Compute the expected rate of return and variance of rate of return of Donald’s portfolio.

(а)
Donald is considering the merits of two securities. He is interested in the common shares of
A Co. and B Inc. The expected monthly rate of return of securities is shown below:
State of Affair
Probability
Stock A
Stock B
Вoom
0.1
40%
-20%
Normal
0.5
20%
8%
Recession
0.4
-10%
15%
At the time of purchase, the market value is $70/share for A and $50/share for B. Donald
plans to invest 10,000 shares of Stock A and 6,000 shares in Stock B.
Transcribed Image Text:(а) Donald is considering the merits of two securities. He is interested in the common shares of A Co. and B Inc. The expected monthly rate of return of securities is shown below: State of Affair Probability Stock A Stock B Вoom 0.1 40% -20% Normal 0.5 20% 8% Recession 0.4 -10% 15% At the time of purchase, the market value is $70/share for A and $50/share for B. Donald plans to invest 10,000 shares of Stock A and 6,000 shares in Stock B.
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