Consider the following information about two stocks:
State of Economy Probability of State Economy Rate of Return if state occurs
Stock A Stock B
Boom 0.35 14% 22%
Normal 0.50 8 10
Bust 0.15 4 3
a. Calculate the expected return for Stock A and Stock B
b. Calculate the standard deviation for Stock A and Stock B
c. What is the coefficient of variation (CV) for Stock A and Stock B
d. If your portfolio is invested 45% in Stock A and 55% in Stock B, what is the portfolio return?
e. If your portfolio is invested 45% in Stock A, 55% in Stock B, and the correlation coefficient between Stock A and Stock B is -0.40, what is the portfolio standard deviation?
f. If the expected T-bill (risk free) rate is 3.20 percent, what is the expected risk premium on the portfolio?
g. Calculate the Sharpe ratio for this portfolio.