Calculate the followings and verify the diversification effect with the data in the table assuming that with the initial
Posted: Wed Mar 30, 2022 3:43 pm
- Calculate The Followings And Verify The Diversification Effect With The Data In The Table Assuming That With The Initial 1 (83.39 KiB) Viewed 53 times
(four) decimal places (how? Texas Instrument BA II PLUS: [2ND]
FORMAT 4 [ENTER]).
-Please do NOT use Excel functions such as VAR.P, VAR.S,
STDEV.P, STDEV.S, COVARIANCE.P, and COVARIANCE.S. These functions
are for historical data and not appropriate for our data based on
expectations
-Show all work including setting up all mathematical equations
with the proper inputs identified.
Calculate the followings and verify the diversification effect with the data in the table assuming that with the initial endowment of $10,000, you invest $6,000 in Stock A and $4,000 in Stock B. Also four states of the economy are assumed to be equally likely. State of the Economy Rate of Return on Stock Rate of Return on Stock A B Depression -20% 5% Recession 10% 20% Normal 30% -12% Boom 50% 9% Q. 1: Expected rate of return for each security Q. 2: Expected rate of return for the portfolio with stocks A and B Q. 3: Variance for each security Q.4: Standard deviation for each security Q. 5: Weighted average of standard deviations of the two securities Q. 6: Covariance between the securities Q. 7: Correlation coefficient between the securities Q. 8: Variance of the portfolio Q. 9: Standard deviation of the portfolio Q. 10: Compare the weighted average of standard deviations of two securities with the portfolio standard deviation. (a) Did you see diversification effect? (b) Why? Justify your answer in part (a).