Question: You are considering investing some money in either Company A or Company B. For both companies, each share of stock is selling for $29/share. Both companies pay an annual dividend of $1/share. Based on some research you have come up with the following probability distribution:
State of the Economy Probability End price of Co. A Hold. per. Ret. of Co. A
Boom .20 $38 ??%
Normal growth .55 $32 ??%
Recession .25 $25 ??%
State of the Economy Probability End price of Co. B Hold. per. Ret. of Co. B
Boom .20 $43 ??%
Normal growth .55 $31 ??%
Recession .25 $21 ??%
You first need to calculate the holding period returns for each scenario. Use this information to formulate an expected holding period return and a standard deviation of returns for both Company A and Company B. The beta of Company A is 1.12 and the beta of company B is 1.41. The two companies are in similar areas of business. Because of this, the correlation of returns between Company A's stock and Company B's stock is 0.75.
A. If you want to put together a portfolio consisting of 40% Company A stock and 60% Company B stock, what would be the expected return of this portfolio?
B. If you want to put together a portfolio consisting of 40% Company A stock and 60% Company B stock, what would be the standard deviation of this portfolio?
C. If you want to put together a portfolio consisting of 40% Company A stock and 60% Company B stock, what would be the beta of this portfolio?