The stock of Business Adventure currently sells for $40 per share. Its dividend payment and its year-end price depend on the state of the economy as follows:
Dividend Stock Price
Boom $2.00 $50
Normal Economy 1.00 43
Recession 0.50 34
Assume the three states of the economy is equally likely to happen.
Expected Return of the stock this year is: 8.75%
Standard Deviation of the stock return for this year is: 17.91%
Risk premium of business adventures stock is: 4.75%
Sharpe Ratio is: 0.266
You’d like to form a portfolio, which consists 60% of the Business Adventure’s stock and 40% of the Treasury bill. Calculate the expected return of such a portfolio and the standard deviation of such a portfolio.
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