C3. (Portfolio returns and risk) There are four securities and five possible economic scenarios

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FINANCE Emery

C3. (Portfolio returns and risk) There are four securities and five possible economic scenarios. The probability of occurrence and security returns are given below.
A. Calculate the expected return and standard deviation of returns for each security.
B. Calculate the correlation coefficient for each pair of securities.
C. Assuming the four securities are weighted equally, calculate the expected return to the portfolio and the standard deviation of the return to the portfolio.
D. Assuming 20% of the portfolio is invested in each of U.S. T-bills and government bonds and 30% is invested in each of corporate bonds and common stock, calculate the expected return to the portfolio and the standard deviation of the return to the portfolio.

State of the Economy Probability of Occurrence U.S. T-Bills Gov. Bonds Corp Bonds Common Stock
High Growth .10 6% 8% 10% 25%
Moderate Growth .25 6 7.5 9 15.5
Slow Growth .35 6 7 8.5 11.5
Stagnation .15 6 6 6 -1
Recession .15 6 4 -2-11.5 1.00

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