Question

Question 11 Amelie considers investing in one stock and one bond. The following table lists the returns on the two assets in three different scenarios and the probability of each scenario occurring. Bond Scenario Probability Stock Recession -5% 50% 6% Normal 30% 10% 2% 20% Boom 20% 0% Amelie decided to form an equally-weighted portfolio by investing 50% of her wealth in the stock and 50% of her wealth in the bond. a) What is the expected return of Amelie's portfolio? b) What is the standard deviation of the returns to Amelie's portfolio?

Answer 1

Page no. Date: ustiam 1 Stock Pdz2 dre -2 Roturm (in) (OC) Le -9.sa 4S. 125 So 9.a75 30 S.So 48.05 15.So 20 20 Expactad Ratusmiz)-4.5o- (.sox (-5) +.3x10 t. 2x20) LEPxx Varionca CEPd 102.2s リ )tandand arianca Oeviation i02 25

Bamd Pdyz Ratusrn lim) dy-y-7 y) 2. 88 2.40 So - 1 60 OC 768 30 -3.60 20592 20 Expactad Retarn )- 3.601 (sox6+.30x 220) Varumea lEPd) 6:24 Standand nauiaTanm JVariames 2) 2.50 1 =

Band Nous Colculatiam a Cauariamea beluaaam Stock Pxdzxdr dy d2c LP) -I.40 So -9.50 2.4 - 2.64 - 1116 -1.6 30 S.sa 15.Sa 3.6 20 Couariamca lEPxdxxdy) - 2S.20

Nous Coleulaliom ar Pantlalia Giem leight af Stock Weght af Bamd Lso1.) (501) So So 6pactad Raturn of Epuctad ght Expacd eight Returm of Stock Poturm of ofand Band Stock So x4.So 4.05 Sa X 3.601. So Expucted Reban o oteh is 4.as

b Standand Deiatiam af Parlfalia 2. Stamdand Dauiation x tShndand Deiationx Band fstack af Stock band Legst af Stockk +2x Cuariomce bataeamx Stock d Band af Band CLo.MX.S)(2.s0x.s) 2 2x(-25.20) X.50 x.50 Launded oo 2 dacine 3. 811 Demation af alahie is 3.8 Standand