a.
Rate of Return if State Occurs | ||||||
State of | Probability of | |||||
Economy | State of Economy (p) | Stock A (rA ) | Stock B (rB) | Stock C (rC) | Expected return of each state of economy rE (= rA*33.33% + rB*33.33%+ rC*33.33%) | Expected return of each state of economy * p |
Boom | 0.55 | 0.15 | 0.22 | 0.42 | 26.33% | 14.48% |
Bust | 0.45 | 0.14 | 0.04 | -0.05 | 4.33% | 1.95% |
Weight of stocks in portfolio | 33.33% | 33.33% | 33.33% | |||
Expected return of portfolio (Sum) rp | 16.43% |
Expected return of equally weighted portfolio is 16.43%
b.
Rate of Return if State Occurs | |||||||||
State of | Probability of | ||||||||
Economy | State of Economy (p) | Stock A (rA ) | Stock B (rB) | Stock C (rC) | Expected return of each state of economy rE (= rA*24% + rB*24%+ rC*52%) | Expected return of each state of economy * p | (rE-rp) | (rE-rp)^2 | Variance calculation = p*(rE-rp)^2 |
Boom | 0.55 | 0.15 | 0.22 | 0.42 | 30.72% | 16.90% | 20.87% | 4.36% | 2.40% |
Bust | 0.45 | 0.14 | 0.04 | -0.05 | 1.72% | 0.77% | -8.13% | 0.66% | 0.30% |
Weight of stocks in portfolio | 24.00% | 24.00% | 52.00% | ||||||
Expected return of portfolio (Sum) rp | 17.67% | ||||||||
Variance of portfolio (sum) | 2.692999% |
Variance of portfolio is 2.692999%
Problem 13-9 Returns and Variances (LO1] Consider the following information: Rate of Return If State Occurs...
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