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as372f08a2 - ActSc 372 Fall 2008 Assignment 2 Due Date...

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ActSc 372 Fall 2008 Assignment 2 Due Date: Wednesday October 15, 2008 (2:30pm) 1. Suppose you have invested only in two stocks, A and B. You expect that returns on the stocks depend on the following three states of economy, which are equally likely to happen. State of Economy Return on Stock A (%) Return on Stock B (%) Bear 12.3 -3.7 Normal 6.5 3 Bull 3 5 (a) Calculate the expected return of each stock. (b) Calculate the standard deviation of returns of each stock. (c) Calculate the covariance and correlation between the two stocks. 2. A pension fund manager is considering two mutual funds: one is the stock fund while the other is the long-term government and corporate bond fund. The pension fund manager is further given the following information on the risky funds: Expected Return Standard Deviation Bond fund 0.08 0.15 Stock fund 0.14 0.25 Correlation between the fund returns is 0.30 (a) Find the minimum variance portfolio and hence compute the risk and reward tradeoff of the resulting minimum-variance portfolio.
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