Question
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Suppose that there are two possible states of the world next year: boom or recession. Suppose that we forecast the following probabilities of these states and the returns to two US stocks, CXW (Corrections Corp of America; a prison stock) and AMR (parent of American Airlines).
Calculate the standard deviation of returns to a portfolio invested 30% in CXW, and 70% in AMR. Please give your answer to four decimal places.
STATEProb.R(CXW)R(AMR)Boom0.6-0.10.25Recession0.40.1-0.25