Question

Problem 13-10 Returns and Standard Deviations (LO1) Consider the following information: Rate of Return if State Occurs State of Probability of State of Economy Economy Stock A Stock B Stock C 34 .08 33 .15 .50 .43 .14 Boom Good Poor Bust -03 05 29 -10 a. Your portfolio is invested 32 percent each in A and C, and 36 percent in B. What is the expected return of the portfolio? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b-1. What is the variance of this portfolio? (Do not round intermediate calculations and round your answer to 5 decimal places, e.g., .16161.) b-2. What is the standard deviation? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Expected return b-1. Variance b-2. Standard deviation

Answer 1

0.32 0.36 0.32 Weight Rate of Return If State Occurs State of Return weight Probability Economy Boom Good Poor Bust Stock A 0.33 0.2 -0.01 -0.17 Stock B 0.43 0.14 -0.09 -0.29 Stock C 0.34 0.08 -0.03 -0.1 0.1056 0.064 -0.0032 -0.0544 0.3 0.05 0.1548 0.0504 -0.0324 -0.1044 Total*probability Total-Expected return d2* probability Expected Portfolio Deviatio TOTAL Return Deviation n^2 VARIANCE 0.3692 0.05538 0.26692 0.071246 0.010686943 0.14 0.07 0.03772 0.001423 0.000711399 -0.0452 -0.01356 -0.14748 0.02175 0.006525105 -0.1908 -0.00954 -0.29308 0.085896 0.004294794 0.10228 0.022218242 0.1088 0.0256 -0.0096 -0.032 10.23% Expected return variance standard deviation(variance^(1/2)) 0.10228 0.02222 14.91% (0.022218242)^(1/2)