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You are considering buying two stocks: Caesar and Cicero. The following table shows the expected rates of return for these two stocks and the probabilities of these expected rates of return occurring.
Expected Rate of Return
Scenario Probability “Caesar” “Cicero”
Recession 30% -15% +2%
Normal 50% +10% +5%
Boom 20% +35% +12%
a. What is the expected return for Caesar in percentage terms? What is the risk (i.e. standard deviation) for Caesar in percentage terms? What is the expected return for Cicero in percentage terms? What is the risk (i.e. standard deviation) for Cicero in percentage terms? Show your work in percentage terms and round to at least 1 decimal point.
b. You decide to form a portfolio with 35% of your wealth in Caesar stock and 65% in Cicero stock. What is the expected return in percentage terms for the portfolio (round to at least 2 decimal points)? What is the risk (i.e. standard deviation) in percentage terms for the portfolio (round to at least 2 decimal points)? Show your work.
c. What is the correlation between the two stocks in percentage terms (round to at least 2 decimal points)? Show your work.
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