Suppose we have two stocks stock A, and B. stock A’s returns are normally distributed with mean 1% and variance 4.5. Stock B’s returns are normally distributed with mean 5% and variance 20. In addition the covariance between the returns of stock A and B is -5. Suppose you buy a portfolio of equal shares from stock A and stock B (To get
the values for Z round the numbers to two decimal places).
(a) What is the probability that stock A will have negative returns
There are more questions than just (a) but I'm hoping with an explanation of how to do (a) I'll be able to figure the rest out
Edit: Here's what I've tried:
P(z<0)
z=(0-0.01)/0.045
z=-0.2222
P(Z<-0.22)
=0.5-0.0871 (Using z-table)
=0.4129
Is that right?
Question (b) asks What is the probability that stock A will exceed 5% and I got 0.1867, is that right?
The last two parts are:
(e) What is the expected returns on your portfolio
(f) What is the variance of your portfolio
How would you do those?