Question

Consider the following information: State of Economy Probability of State of Economy Rate of Rtn Stock A Rate of Rtn Stock B Rate of Rtn Stock C Boom .20 .24 .45 .33 Good .35 .09 .10 .15 Poor .30 .03 -.10 -.05 Bust .15 -.05 -.25 -.09 a. Your portfolio is invested 30 percent each in A and C, and 40 percent in B. What is the expected return of the portfolio? b. What is the variance of this portfolio? c. What is the standard deviation of this portfolio? d. What does the standard deviation reveal?

Answer 1

a) expected return of post folio: peso state of economy :- Boom 'stock proportion returen (a) (b) A - 0.3 0.24 B 0.4 0.45 c 0.3 0.33 expected setuan dan expected retusin (axb) 0.072 00180 0.099 0-351 state of Economy: Good return stock proportion return A 0.3 0.09 - B oly 0.10 -c 0.3 su-0.15 expeded return State of economy i poos expected 0.027 0.04 0.045 0-112 stock return Expected 0.009 U proportion return 0.3 0.03 0.4 -0.10 0.3 -0.05 expected return 0 . B -0.04 -0.ols -0.046

state of economy; Bust stork A B c propostion 6.3 0.4 0.3 expected return -0.05 -0.25 -O'og retuan expected return -0.015 - 0.) -0.027 - 0.142 expected return of portfolio state of economy gietygn percobale lily expected schery ca (b) Boom Good poos 0.351 0.112 -0.046 -0.142 0.20 0.35 0.30 -0.15 (axb) 0.0702 0.0392 -0.0138 -0.0213 0.0743 Bust expected return of portfolio (7) = 0.0743 ros) X = 7.437.

(6) Variance of post folio = 0.2 (0.351-0.0743)2 + 0.35 (0-112 - 0.0743) +0.30 (-0.046 - 0.0743)2 +0.15 (-0-142–0-074372 = 0.0153+ 0.00050 +0.0043 +0.0070 0-027) : Variance of post folio = 0.0271 (09) 2,71). formula for calculating Varianus of postfolio /expeded return a of portfolio in each state of I economy expeded netuan of portfolio - Cweighled se teply) 10 standard deviation of post folio Variance 0.0271 0.1646 (or) 16.46%

(d) standard deviation reveals the volatility of refugios of stock. It measures the amount that the return deviates from - mean.. In the return where present case expected from portfolio = 7.43% all standard deviation - 16:46% It implies that the can deviate upto mean of coil expected 16.46 % refusing from