Question

20. What is the variance of the returns on a portfolio that is invested 60 percent in stock S and 40 percent in stock T? State of Economy Boom Normal Probability of State of Economy 20% 80% Returns if State Occurs Stock S Stock T 17% 7% 13% 10% A. .000017 B. .000023 C. .000118 D. .000136 E. .000161

Answer 1

state of economy deviation 2x probability rate of return if state occurs Stocks Stock T 17% 13% 10% weighted return (weight x return) Stock S StockT 10.200% 2.800% 7.800% 4.000% deviation (weighted return- deviation^2 expected return) 0.960% 0.009216% -0.240% 0.000576% 7% Boom Normal | weighted sum probability expected return (sum of weighted return) 13.000% 0.20 2.60% 11.800% 0.80 9.44% 12.04% 0.000018432 0.00000461 Weight 40.00% 60.00% 2400/(2400+1600) Variance Standard deviation = variance10.5 0.000023 0.48%

Variance - 0.0000230