Question

Consider the following information: Rate of Return if State Occurs State of Probability of Stock Stock Stock Economy State of Economy A B C Boom 0.28 0.19 0.38 0.28 Good 0.25 0.16 0.23 0.10 Poor 0.10 e.ee -.09 -0.05 Bust 0.45 -0.08 -0.22 -0.10 a. Your portfolio is invested 25 percent each in A and C and 50 percent in B. What is the expected return of the portfolio? (Do not round Intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Expected return % b-1. What is the variance of this portfolio? (Do not round Intermediate calculations. Round your answer to 5 decimal places.) Variance b-2. What is the standard deviation? (Do not round Intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Standard deviation %

Answer 1

K3 - X v fx =H3-$J$8 A B C D E G H Expected State of Rate of returns if state Weighted returns if state portfolio 1 economy occurs occurs (WeightxReturn) return (r) 2 A B C A B с 3 Boom 0.19 0.38 0.28 0.05 0.19 0.07 0.31 4 Growth 0.16 0.23 0.10 0.04 0.12 0.03 0.18 5 Stagnant 0.00 -0.09 -0.05 0.00 -0.05 -0.01 -0.06 6 Recession -0.08 -0.22 -0.10 -0.02 -0.11 -0.03 -0.16 Probability [(P(r)] Expected return [rxP(r)=u] Ir-u (r-u)^2 P(r)x(r-u)^2 0.20 0.25 0.10 0.45 6.15% 4.50% -0.58% -6.98% 0.2765 0.1490 (0.0885) (0.1860) 0.0765 0.0222 0.0078 0.0346 0.01529 | 0.00555 0.00078 0.01557 7 8 Weights 0.25 0.50 0.25 Expected return 3.10% Variance (o^2) 0.03719 Standard deviation (o) 19.29%

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