Consider the case of two financial assets and three market conditions (states). The tablebelow gives the respective probability for each market condition and the return of each assetin each one of them. Market ConditionsStateRecession NormalExpansionProbability of state30%40% 30%Return of asset A-30% 20%55%Return of asset B-10% 70%0%Consider the portfolio with 50% investment in each of the two assets above. Calculatethe expected return and the standard deviation of the portfolio.

Expected rate of the portfolio depends on the weight of stocks in portfolio and return on stocks of…

Answered: onsider the case of two financial…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 20P

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Consider the case of two financial assets and three market conditions (states). The table
below gives the respective probability for each market condition and the return of each asset
in each one of them.

Market Conditions

State	Recession	Normal	Expansion
Probability of state	30%	40%	30%
Return of asset A	-30%	20%	55%
Return of asset B	-10%	70%	0%

Consider the portfolio with 50% investment in each of the two assets above. Calculate
the expected return and the standard deviation of the portfolio.

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