Consider the following information: |
Rate of Return if State Occurs | ||||||||||||
State of | Probability of | |||||||||||
Economy | State of Economy | Stock A | Stock B | Stock C | ||||||||
Boom | .55 | .15 | .22 | .42 | ||||||||
Bust | .45 | .14 | .04 | − | .05 | |||||||
a. |
What is the expected return on an equally weighted portfolio of these three stocks? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
Expected return | % |
b. |
What is the variance of a portfolio invested 24 percent each in A and B and 52 percent in C? (Do not round intermediate calculations and round your answer to 6 decimal places, e.g., 32.161616.) |
Variance |
1.
=0.55*(0.15+0.22+0.42)/3+0.45*(0.14+0.04-0.05)/3
=16.43333%
2.
Expected
returns=0.55*(24%*0.15+24%*0.22+52%*0.42)+0.45*(24%*0.14+24%*0.04+52%*(-0.05))=0.176700
Variance=0.55*(24%*0.15+24%*0.22+52%*0.42-0.176700)^2+0.45*(24%*0.14+24%*0.04+52%*(-0.05)-0.176700)^2=0.02081475
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