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

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Question

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%

  1. Calculate expected returns and standard deviations of twosecurities.

  1. 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

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