Ms. Smith wants to invest in two securities, ABC and PQR, and the relevant information is...

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Finance

Ms. Smith wants to invest in two securities, ABC and PQR, andthe relevant information is below:
State of the Economy
Probability
Return on ABC (%)
Return on PQR (%)
Bear
0.25
-15%
4%
Moderate
0.5
5%
4%
Bull
0.25
20%
4%
Calculate expected returns and standard deviations of twosecurities.
Ms. Smith shorts $1,000 of PQR and invests all proceeds fromthis short sale as well as $3,000 of her own money into ABC. Whatis the expected return and the standard deviation of herportfolio?
show formula and explanation

Answer & Explanation Solved by verified expert

4.3 Ratings (659 Votes)

State of Economy Probability Return on ABC Return on PQR Bear 025 15 4 Moderate 05 5 4 Bull 025 20 4 For ABC Expected Return ER PBEARRBEAR PMODERATERMODERATE PBULLRBULL ERABC 02515 055 0520 375 Variance of the return when See Answer

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Transcribed Image Text

Ms. Smith wants to invest in two securities, ABC and PQR, andthe relevant information is below:State of the EconomyProbabilityReturn on ABC (%)Return on PQR (%)Bear0.25-15%4%Moderate0.55%4%Bull0.2520%4%Calculate expected returns and standard deviations of twosecurities.Ms. Smith shorts $1,000 of PQR and invests all proceeds fromthis short sale as well as $3,000 of her own money into ABC. Whatis the expected return and the standard deviation of herportfolio?show formula and explanation

State of the Economy	Probability	Return on ABC (%)	Return on PQR (%)
Bear	0.25	-15%	4%
Moderate	0.5	5%	4%
Bull	0.25	20%	4%