Here are the three scenarios of the state of the economy in a country A: State...

80.2K

Verified Solution

Question

Finance

Here are the three scenarios of the state of the economy in acountry A: State of Economy Probability Boom 0.2 Normal 0.6Recession 0.2 Suppose the rates of return of the bond in threescenarios of the economy are 10% in a boom, 5% in a normal period,and -5% in a recession. The stock returns in the three scenariosare 20%, 10%, and -10%, respectively. Asset Allocation(Two-risky-assets Portfolio) Questions: 1. Compute the covariancebetween the two risky assets. 2. Compute the correlationcoefficient and explain the correlation between these two riskyassets. The Three Rules of Two-Risky-Assets Portfolio Based on theresults of Question 1 and Question 2. If an investor plans toinvest into a risky portfolio P which is composed of the stock andthe bond, and he allocates 40% into the stock and the rest 60% intothe bond. Apply Rules of Two-Risky-Assets Portfolio and compute: 3.The Expected Return of the risky portfolio P. 4. The Variance ofthe risky portfolio P.

Answer & Explanation Solved by verified expert

4.1 Ratings (440 Votes)

State of economyProbabilityRate of return of BondRate of return of See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Here are the three scenarios of the state of the economy in acountry A: State of Economy Probability Boom 0.2 Normal 0.6Recession 0.2 Suppose the rates of return of the bond in threescenarios of the economy are 10% in a boom, 5% in a normal period,and -5% in a recession. The stock returns in the three scenariosare 20%, 10%, and -10%, respectively. Asset Allocation(Two-risky-assets Portfolio) Questions: 1. Compute the covariancebetween the two risky assets. 2. Compute the correlationcoefficient and explain the correlation between these two riskyassets. The Three Rules of Two-Risky-Assets Portfolio Based on theresults of Question 1 and Question 2. If an investor plans toinvest into a risky portfolio P which is composed of the stock andthe bond, and he allocates 40% into the stock and the rest 60% intothe bond. Apply Rules of Two-Risky-Assets Portfolio and compute: 3.The Expected Return of the risky portfolio P. 4. The Variance ofthe risky portfolio P.