Reference no: EM131947104

1. a) The return on shares of the Orange Company are predicted under the following states of nature. The states of nature are all equally likely, and because there are a total of three states, each state has a 33.333% chance of occurring.

Recession -0.11

Normal +0.05

Boom +0.24

What is the standard deviation of Orange?

b) Toyota Corp.'s stock is $25 per share. Its expected return is 21% and variance is 10%. Honda Corp.'s stock is $23 per share. Its expected return is 20% and variance is 5%. Benz Corp.'s stock is $45 per share. Its expected return is 11% and variance 4%. What would be the expected return of a portfolio consisting of 50% Toyota and 50% Honda?

c) Toyota has an expected return of 24%, and a variance of 0.010. Honda has an expected return of 20%, and a variance of 0.008. The covariance between Toyota and Honda is 0.03. Using these data, calculate the variance of a portfolio consisting of 50% Toyota and 50% Honda.

d) The return on the Rush Corporation in the state of recession is estimated to be -24% and the return on Rush in the state of boom is estimated to be 34%. The return on the Oberman Corporation in the state of recession is estimated to be 44% and the return on Oberman in the state of boom is estimated to be -18%. Given this information, what is the covariance between Rush and Oberman if there is a 0.60 probability that the economy will be in the state of boom and a 0.40 probability that the economy will be in the state of recession.