FIN 500 Module 3

Notes: This assignment is to be done individually. Show all calculations necessary and wordprocess your assignment.

Problem 1

The expected returns earned from investment in the stock of two companies, Company A and

Company B, are shown in the following table. Use the table to complete parts (a) through (e)

below.

Demand

Probabilit

Expected

Expected

for

y of

Return: Stock Return: Stock

Product

Demand

A

B

Strong

0.3

40%

20%

Normal

0.45

20%

5%

Weak

0.25

0%

(5%)

(a) Compute the expected rates of return for each stock.

(b) Compute the standard deviations for each stock.

(c) Compute the coefficient of variation for each stock. Based on the coefficient of variation,

which stock has the higher risk for investment?

(d) Assume a two-stock portfolio with $25,000 in Company A and $75,000 in Company B.

Compute the expected return on the portfolio.

(e) Compute the standard deviation of the two-stock portfolio.