Question

Rate of Return if State Occurs State of Probability of Economy State of Economy Stock A Stock B Stock C Boom 0.10 0.18 0.48 0.33 Good 0.30 0.11 0.18 0.15 Poor 0.40 0.05 -0.09 -0.05 Bust 0.20 -0.03 -0.32 -0.09 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? (Don lations. 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.)

Answer 1

Weight Rate of Return If State Occurs 0.25 0.50 0.25 State of Return weight Probability Economy Boom Good Poor Bust 0.10 0.30 0.40 0.20 Stock A 0.18 0.11 0.05 -0.03 Stock B 0.48 0.18 -0.09 -0.32 Stock C 0.33 0.15 -0.05 -0.09 0.045 0.0275 0.0125 -0.0075 0.24 0.09 -0.045 -0.16 0.0825 0.0375 -0.0125 -0.0225 Total*probability Total-Expected return EXPECTED d2*probability PORTFOLIO DEVIATIO TOTAL RETURN DEVIATION N^2 VARIANCE 0.3675 0.03675 0.34025 0.11577 0.011577006 0.155 0.0465 0.12775 0.01632 0.004896019 -0.045 -0.018 -0.07225 0.00522 0.002088025 -0.19 -0.038 -0.21725 0.047198 0.009439513 0.02725 0.028000563 b-1 Expected return variance standard deviation=(variance (1/2)) 0.02725 0.02800 (0.02800)^(1/2) 2.73% 0.02800 16.73% b-2