Question

Expected return and standard deviation. Use the following information to answer the questions: - a. What is the expected return of each asset? b. What is the variance and the standard deviation of each asset? c. What is the expected return of a portfolio with 10% in asset J. 47% in asset K, and 43% in asset L? d. What is the portfolio's variance and standard deviation using the same asset weights from part (c)? Hint: Make sure to round all intermediate calculations to at least seven (7) decimal places. The input instructions, phrases in parenthesis after each answer box, only apply for the answers you will type. a. What is the expected return of asset J? (Round to four decimal places.) i Data Table (Click on the following icone in order to copy its contents into a spreadsheet.) State of Economy Boom Growth Stagnant Recession Probability of State 0.29 0.39 0.22 0.10 Return on Asset J in State 0.070 0.070 0.070 0.070 Return on Asset Kin State 0.200 0.150 0.060 -0.090 Return on Asset Lin State 0.250 0.230 0.060 -0.220 Print Done

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

A B C D EF 2 Probability 3 4 5 State of Economy Boom Growth Stagnant Recession Expected return Variance Standard Deviation 0.29 0.39 0.22 0.10 Stock ) 0.070 0.070 0.070 0.070 0.0700 0.00000 0.0000 Stock K 0.200 0.150 0.060 -0.090 0.1207 0.00741 0.0861 Stock L 0.250 0.230 0.060 -0.220 0.1534 0.02086 0.1444 8 b. 10 Weight 12 Portfolio's Stock Stock) Stock K Stock L 10% 47% 43% c Expected return of Portfolio 0.1297 16 17 18 Covariance(A,B) Covariance (A,C) Covariance (B,C) 0.000000 0.000000 0.012212 23 d. Variance of Portfolio 0.00503 26 Standard deviation of Portfolio 0.0709 27 28

Cell reference -

В C F 2 Probability 0.29 0.2 0.07 0.23 0.39 0.22 5 0.06 State of Economy Boom Growth Stagnant Recession Expected return Variance Standard Deviation 0.1 Stock) Stock K Stock L 0.07 0.25 0.15 0.07 0.06 -0.09 -0.22 =SUMPRODUCT($C$3:$C$6,D3:06) =SUMPRODUCT($C$3:$C$6,E3:E6) =SUMPRODUCT($C$3:$C$6,F3:F6) =SUMPRODUCT((D7-D3:D6)^2,$C$3:$C$6) =SUMPRODUCT((E7-E3:E6)^2,$C$3:$C$6) =SUMPRODUCT((F7-F3:F6)^2,$C$3:$C$6) =SQRT(D8) =SQRT(E8) =SQRT(F8) 0.07 b. Weight 12 Portfolio's Stock Stock) Stock K Stock L 13 0.1 0.47 0.43 14 16 c Expected return of Portfolio =C12*D7+C13*E7+C14*F7 17 18 20 Covariance(A,B) Covariance (A,C) Covariance (B,C) =SUMPRODUCT((D7-D3:D6),(E7-E3:E6),C3:06) =SUMPRODUCT((D7-D3:D),(F7-F3:F6),C3:C6) =SUMPRODUCT((E7-E3:E6),(F7-F3:F6),C3:06) 21 23 d. Variance of Portfolio =(C12*D8)^2+(C13*E8)^2+(C14*F8)^2+2*C12*C13*C19+2*C12*C14*C20+2*C13*C14*C21 Standard deviation of Portfolio =SQRT(C23)

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