An Investment Firm Is Considering a Portfolio with Equal Weighting

Multiple Choice

An investment firm is considering a portfolio with equal weighting in a cyclical stock and a countercyclical stock. It is expected that there will be three economic states; Good, Average and Bad, each with equal probabilities of occurrence. The cyclical stock is expected to have returns of 12%, 5% and 1% in Good, Average and Bad economies respectively. The countercyclical stock is expected to have returns of -8%, 2% and 14% in Good, Average and Bad economies respectively. Given this information, calculate portfolio standard deviation.

A) 7.33%
B) 6.33%
C) 5.33%
D) 4.33%
E) 3.33%