Question

XYZ Investment Corporation is considering a portfolio with 70% weighing in a cyclical stock and 30% weighing in a countercyclical stock. It is expected that there will be three economic states; Good, Average, and Bad, each with equal probabilities of occurrence. The cyclical stock is expected to have returns of 25%, 5%, and 1% in Good, Average, and Bad economics respectively.  The countercyclical stock is expected to have returns of -8%, 2%, and 14% in Good, Average, and Bad economies respectively. Given this information, what is the standard deviation of 'cyclical stock'?

a) 10.5%

b) 1.1%

c) 2.7%

Answer 1

ANS : (a) : 10.5%