14 Nov Finance questions
The following table lists the state-contingent returns on Security A (rA,s) and Security B
State of Economy ps rA,s rB,s Bust 50% -0.30 +0.20 Boom 50% +0.45 -0.05 A. What are the expected returns for Security A and Security B?
B. What are the standard deviations of the returns for Security A and Security B?
C. Find the expected return and standard deviation for the least risky combination of Security A and Security B. What is the composition of this portfolio (i.e., find the security weights wA and wB)?
D. Suppose your initial wealth is $1000 and that you can borrow or lend up to $1000 at the riskless rate of interest of 5% during the course of the next year. Given this information, describe the most profitable riskless trading strategy which can be implemented, and calculate the profit from implementing this strategy.
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