Suppose Stock A has monthly returns distributed uniformly between -6% and 8% while Stock B has monthly stock returns distributed uniformly between -10% and 8% (continuously distributed in both cases). Suppose you want to invest $100. Further suppose you put 25% in Stock A and 75% in Stock B. Assume that the two stock returns are independent of one another. What are the mean and standard deviation of your total (portfolio) returns? NOTE: the variance of a continuous uniform random variable between a and b is given by $var = \left(\frac{1}{12}\right) * (b - a)^2$
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The range of Stock A's returns is -6% to 8%. The midpoint of this range is (8% - 6%)/2 = 1%. The mean of Stock A's returns is the midpoint, which is 1%. The standard deviation of Stock A's returns is (8% - 1%)/2 = 3.5%. Show more…
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