Question

Rate of Return if State Occurs State of Economy State of Economy Stock A Stock B Stock C Boom Probability of 0.18 0.11 0.48 0.18 -0.09 0.32 0.33 0.15 0.10 0.30 0.40 Good -0.05 -0.09 0.05 -0.03 Poor 0.20 Bust a. Your portfolio is invested 25 percent each in A and C and 50 percent in B. What is the expected return of the portfolio? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Expected return b-1. What is the variance of this portfolio? (Do not round intermediate calculations. Round your answer to 5 decimal places.) Variance b-2. What is the standard deviation? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Standard davintian

Answer 1

Answer(a): Calculating Expected return-

State of economy	Probability	Stock A	Stock B	Stock C
Boom	.10	.18	.48	.33
Good	.30	.11	.18	.15
Poor	.40	.05	-.09	-.05
Bust	.20	-.03	-.32	-.09

Expected return = Probability * Rate of normal return

Expected return of Stock A= (.10*.18) + (.30*.11) + (.40*.05) + (.20*-.03)

Expected return of Stock A: (.018) + (.033) + (.02) + (-.006)

Expected return of Stock A = .065 or 6.5%

Expected return of Stock B= (.10*.48) + (.30*.18) + (.40*-.09) + (.20*-.32)

Expected return of Stock B= (.048) + (.054) + (-.036) + (-.064)

Expected return of Stock B= .002 or .2%

Expected return of Stock C= (.10*.33) + (.30*.15) + (.40*-.05) + (.20*-.09)

Expected return of Stock C= (.033) + (.045) + (-.02) + (-.018)

Expected return of Stock C= .04 Or 4%

Expected return of the portfolio = Sum of all the stocks' expected return

Expected return of the portfolio = (6.5%) + (.2%) + (4%)

Expected return of the portfolio = 10.70%