a) Expected return :
Expected return A= 0.58*0.07+0.42*0.15= 0.1036
Expected return B = 0.58*0.15+0.42*0.05= 0.108
Expected return C = 0.58*0.33+0.42*(-0.07)=0.162
Expected return of portfolio :
Probability (1) | Return (2) | Expected return (3) (1*2) |
1/3 | 0.1036 | 0.035 |
1/3 | 0.108 | 0.036 |
1/3 | 0.162 | 0.054 |
Expected return | 0.125 |
Expected return of portfolio = 0.125 or 12.5%
b) Calculation of Variance of portfolio:
Expected return of portfolio:
Probability (1) | Return (2) | Expected return (3) (1*2) |
0.2 | 0.1036 | 0.0207 |
0.2 | 0.108 | 0.0216 |
0.6 | 0.162 | 0.0972 |
Expected return | 0.1395 |
Expected return = 0.1395 or 13.95%
Calculation of Variance:
Probability (1) | Return-Expected return (2) | Square of Return-Expected return (3) | Variance (4) (1*3) |
0.2 | 0.1036-0.1395=-0.0359 | (-0.0359)^2=0.00128 | 0.000256 |
0.2 | 0.108-0.1395=-0.0315 | (-0.0315)^2=0.00099 | 0.000198 |
0.6 | 0.162-0.1395=0.0225 | (0.0225)^2=0.00051 | 0.000306 |
Variance | 0.00076 |
Variance = 0.00076
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