Question
There are two stocks in the market, Stock A and Stock B . The price of...
There are two stocks in the market, Stock A and Stock B . The price of Stock A today is $68. The price of Stock A next year will be $57 if the economy is in a recession, $80 if the economy is normal, and $90 if the economy is expanding. The probabilities of recession, normal times, and expansion are .13, .67, and .20, respectively. Stock A pays no dividends and has a correlation of .63 with the market portfolio. Stock B has an expected return of 13.3 percent, a standard deviation of 33.3 percent, a correlation with the market portfolio of .17, and a correlation with Stock A of .29. The market portfolio has a standard deviation of 17.3 percent. Assume the CAPM holds.
What is standard deviation of a portfolio consisting of 65 percent of Stock A and 35 percent of Stock B?
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