Question

Probability ideas, including joint probability distributions, play a major role in financial activities. For example, portfolio managers must allocate funds among competing assets. Suppose there are two assets: Microsoft (M) stock and Starbucks (S) stock. For Microsoft stock, the following returns are possible: −10%, 10%, 20%, and 30%. For Starbucks stock, the following returns are possible: 0% and 20%. The joint probability distribution of the returns of the two assets is

Answer 1

Answer:

kindly check explanatio0n section.

Explanation:

PS: The joint probability distribution of the returns of the two assets is given in the attached picture. Also, both stocks are not independent.

So, let us delve straight into the solution to this particular question or problem. From the question, we are given two assets that is, Microsoft (M) stock and Starbucks (S) stock.

Thus, the expected return on Microsoft stock can be determined and the expected return on Starbucks stock can also be determined.

[1]. The expected return on Microsoft stock  = - 10 × 0.15 + 30 × 0.20 + 10 × 0.35 + 20 ×0.30 = 14%.

Using excel, Standard deviation on Microsoft stock = 12.4[ from $\sqrt{(100 * 0.35 + 100 * 0.15 + 900 * 0.20 + 400 * 0.30}$ - √[14]² ]

[2]. The expected return on starbucks stock= 20 × 0.15 + 20 × 0.10 + 20 × 0.2 = 12%.

Using excel, Standard deviation on Starbucks stock = √( 400 × 0.15 + 400 × 0.20 + 400 × 0.15 + 400 × 0.10) - √(12)²

= 9.8