Question

QUESTION 6 Assume that you formed a portfolio by investing $15,000 in Wachovia and $12,000 in Apple. Below is information on three states of nature" and the return that you would see over the next year from each security in cach state of nature. What will be the expected return for your portfolio? Wachovia Apple Probability of "state" 1/3 1/3 1/3 .0.1120 6.0.1150 C. 0.1144 d. 0.1180 .0.1210

Answer 1

Wachovia
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(A)^2* probability
1	0.3333	13	4.3329	2.0011	0.000133467
2	0.3333	-8	-2.6664	-18.9989	0.012030737
3	0.3333	28	9.3324	17.0011	0.009633617
	Expected return %=	sum of weighted return =	11	Sum=Variance Wachovia=	0.0218
			Standard deviation of Wachovia%	=(Variance)^(1/2)	14.76
Apple
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(B)^2* probability
1	0.3333	6	1.9998	-5.9988	0.0011994
2	0.3333	12	3.9996	0.0012	4.79952E-11
3	0.3333	18	5.9994	6.0012	0.00120036
	Expected return %=	sum of weighted return =	12	Sum=Variance Apple=	0.0024
			Standard deviation of Apple%	=(Variance)^(1/2)	4.9
Covariance Wachovia Apple:
Scenario	Probability	Actual return% -expected return% for A(A)	Actual return% -expected return% For B(B)	(A)*(B)*probability
1	0.3333	2.0011	-5.9988	-0.0004001
2	0.3333	-18.9989	0.0012	-7.5988E-07
3	0.3333	17.0011	6.0012	0.00340056
			Covariance=sum=	0.0029997
		Correlation A&B=	Covariance/(std devA*std devB)=	0.414750952
	Expected return%=	Wt Wachovia*Return Wachovia+Wt Apple*Return Apple
	Expected return%=	0.555555555555556*11+0.444444444444444*12
	Expected return%=	11.44 = 0.1144