Expected return and standard deviation for both stock

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Use the following information to evaluate whether or not you should buy stock A (assume you already own a well-diversified portfolio and are debating whether or not to add this stock to your portfolio).  Show your work and justify your decision appropriately with financial theory.

                                Stock A                                                                                 S&P 500

                Probability                          Return                                  Probability          Return

                    0.05                                      -80%                                      0.25                  -20%

                    0.25                                       -20%                                       0.50                      10%

                    0.50                                       14%                                       0.25                    30%

                    0.20                                        60%

The current yield on the 10-year Treasury Note (risk-free rate) is 3.5%. The correlation between Stock A and the market is 0.60. Hint One – Remember that the S&P 500 represents the market and that you can use the two probability distributions above to get the expected return and standard deviation for both Stock A and for the market (round calculations to 2 decimal places in percentage terms). Hint Two – You will use the SML to get the required return and you will need to calculate beta from the data provided (round beta to two decimal places).

Reference no: EM132006586

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