You decide to invest in a portfolio consisting of 29 percent
Stock A, 40 percent Stock B, and the remainder in Stock C. Based on
the following information, what is the variance of your
portfolio?
State of Economy | Probability of State | Return if State Occurs | ||||||||||
of Economy | Stock A | Stock B | Stock C | |||||||||
Recession | .107 | − | 9.40% | − | 2.80% | − | 11.80% | |||||
Normal | .651 | 8.70% | 10.52% | 16.20% | ||||||||
Boom | .242 | 21.41% | 24.83% | 29.53% | ||||||||
Multiple Choice
.00867
.01115
.00826
.00768
.00933
Answer is 0.00826
Weight of Stock A = 0.29
Weight of Stock B = 0.40
Weight of Stock C = 0.31
Recession:
Expected Return = 0.29 * (-0.0940) + 0.40 * (-0.0280) + 0.31 *
(-0.1180)
Expected Return = -0.0750
Normal:
Expected Return = 0.29 * 0.0870 + 0.40 * 0.1052 + 0.31 *
0.1620
Expected Return = 0.1175
Boom:
Expected Return = 0.29 * 0.2141 + 0.40 * 0.2483 + 0.31 *
0.2953
Expected Return = 0.2530
Expected Return of Portfolio = 0.1070 * (-0.0750) + 0.6510 *
0.1175 + 0.2420 * 0.2530
Expected Return of Portfolio = 0.1297
Variance of Portfolio = 0.1070 * (-0.0750 - 0.1297)^2 + 0.6510 *
(0.1175 - 0.1297)^2 + 0.2420 * (0.2530 - 0.1297)^2
Variance of Portfolio = 0.00826
You decide to invest in a portfolio consisting of 29 percent Stock A, 40 percent Stock...
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