Question

Hey, I only want part B answered! Thanks

P7-16 You are given the following data on several shares: State of the economy Probability Returns in each state of economy Gere Mining Reubenfeld Films DeLorean Automotive 25% 40% 24% -20% Boom Expansion Recession 50% 12% 10% 12% 25% -20% -12% -40% a Calculate the expected return and standard deviation for each share. b Calculate the expected return and standard deviation for a portfolio invested equally in Gere Mining and Reubenfeld Films. How does the standard deviation of this portfolio compare to a simple 50-50 weighted average of the standard deviations of the two shares? c Calculate the expected return and standard deviation for a portfolio invested equally in Gere Mining and DeLorean Automotive. How does the standard deviation of this portfolio compare to a simple 50-50 weighted average of the standard deviations of the two shares? d Explain why your answers regarding the portfolio standard deviations are so different in parts (b) and (c).

Answer 1

b.

B14 ✓ fc =SQRT(B13) 2 Reubenfield Films 0.24 0.1 -0.12 =SUMPRODUCT($B$3:$B$5,D3:05) 0.5 SquaredDeviation for Gere Mining Squared Deviation for Reubenfield Films Cross Product =($C$6-C3)^2 =($D$6-D3)^2 =($C$6-C3)*($D$6-D3) =($C$6-C4)^2 =($D$6-D4)^2 = ($C$6-C4)*($D$6-04) =($C$6-C5)^2 =($D$6-D5)^2 =($C$6-C5)*($D$6-D5) 1 State of the economy Probability Returns in Each state Gere Mining 3 Boom 0.25 0.4 Expansion 0.5 0.12 5 Recession 0.25 -0.2 6 Expected Returns =SUMPRODUCT($B$3:$B$5,C3:05) 7 Weight in the portfolio 0.5 8 Wexpected Return of the Portfolio =SUMPRODUCT(C6:06,C7:07) 9 Variance of each stock =SUMPRODUCT($B$3:$B$5,E3:E5) 10 Standard Deviation of each stock =SQRT(09) 11 50-50 weighted Standard Deviation =SUMPRODUCT(C7:07,C10:D10) 12 Covariance =SUMPRODUCT(B3:B5, G3:G5) 13 Variance of the Portfolio T=[(C7*C10)^2+D7*D10)^2+2*07*07*B127 14 Standard Deviation of the portfolio 1=SQRT(B13) =SUMPRODUCT($B$3:$B$5,F3:F5) =SQRT(09) 16

fix =SQRT(B13) B Probability 25% C D Returns in Each state Gere Mining Reubenfield Films SquaredDeviation for Gere Mining 40% 24% 8.410% 12% 10% 0.010% -20% -12% 9.610% 11.0% 8.0% 0.5 0.5 SquaredDeviation for Reubenfield Films 2.560% 0.040% 4.000% Cross Product 4.64000000% 0.02000000% 6.20000000% B14 - X А 1 State of the economy 2 3 Boom 4. Expansion 5 Recession 6 Expected Returns 7 Weight in the portfolio 8 Wexpected Return of the Portfolio 9 Variance of each stock 10 Standard Deviation of each stock 11 50-50 weighted Standard Deviation 12 Covariance 13 Variance of the Portfolio 14 Standard Deviation of the portfolio 50% 25% 9.5% 0.02 0.05 0.21 0.13 0.1706 0.03 0.03 0.1704)