ABC securities analysts have gathered the following data on two stocks in the market, Stock...
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ABC securities analysts have gathered the following data on two stocks in the market, Stock A and Stock B. Todays price of Stock A is Rs.75 and its next years price will be Rs. 64, Rs. 87, and Rs. 97, if the economy is in a recession, normal, and expanding respectively. The probabilities of recession, normal times, and expansion are 0.2, 0.6, and 0.2, respectively. Also, Stock A pays 0 dividends. Stock B has an expected return of 14 percent, a standard deviation of 34 percent, and a correlation with Stock A of 0.36. (Show all the calculations used for computing the final answers)
i. If the risk aptitude of the firms client is low i.e. hes risk-averse investor and holds a welldiversified portfolio, which stock would be preferable to him and Why? (1.5 Marks)
ii. Assume that the analysts construct a portfolio with 70% invested in Stock A, compute this portfolios expected return and risk?
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