Question

Given the following data for Product A and Product B

Condition of                 Probability                            Rate of Return if the event occurs
the Economy of the Events Product A             Product B

Strong 35%                                          20% 25%

Moderate 25%                                          15% 20%

Weak 40% 5% 10%

The amount of investment will be on a 45:55 ratio.

Questions (Note: Your answers must have two decimal places):

a) Compute for the expected return for Product A and Product B for the three events (condition of the economy).

Strong - Answer%

Moderate - Answer%

Weak - Answer%

b) Compute for the expected return on portfolio. Answer%

c) Compute for the portfolio standard deviation. Answer%

Answer 1

a).

Formula	P	Ra	Rb	P*Ra	P*Rb
Condition of economy	Probability	Rate of return Product A	Rate of return Product B	Expected return for Product A	Expected return for Product B
Strong	35%	20%	25%	7.00%	5.00%
Moderate	25%	15%	20%	3.75%	3.00%
Weak	40%	5%	10%	2.00%	0.50%

b).

Formula		P	Ra	Rb	Rp = (45%*Ra)+(55%*Rb)	E = P*Rp	P*(E(Rp) - E)^2
	Condition of economy	Probability	Rate of return Product A	Rate of return Product B	Portfolio return	Expected portfolio return	Variance
	Strong	35%	20%	25%	22.75%	7.96%	0.001839688
	Moderate	25%	15%	20%	17.75%	4.44%	0.000126563
	Weak	40%	5%	10%	7.75%	3.10%	0.002402500
	Total					15.50%	0.004368750
Variance Total^0.5	Standard deviation						6.61%

Expected portfolio return = 15.50%

Portfolio standard deviation = 6.61%