Consider the following information: a. What is the expected return on an equally

Question

Consider the following information:

a. What is the expected return on an equally weighted portfolio of these three stocks? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Expected return %

b. What is the variance of a portfolio invested 20 percent each in A and B and 60 percent in C? (Do not round intermediate calculations and round your answer to 6 decimal places. (e.g., 32.161616)) Variance

State of Economy Probability of State of Economy Stock A Stock B Stock C Boom 0.64 0.11 0.20 0.38 Bust 0.36 0.18 0.10 -0.04

Explanation / Answer

a.

Stock A = (0.64*0.11)+(0.36*0.18) = 0.0704+0.0648=0.14 or 14%

Stock B = (0.64*0.20)+(0.36*0.10)=0.128+0.036=0.17 or 17%

Stock C = (0.64*0.38)+(0.36* -0.04)=0.2432-0.0144=0.23 or 23%

b.

Stock A = 0.64* (0.11-0.14)2+0.36* (0.18-0.14)2 =

=(0.64 * 0.0009) + (0.36*0.0016) =0.000576 +0.000576 = 0.001152

Stock B = 0.64* (0.20-0.14)2+0.36* (0.10+0.14)2 =

=(0.64 * 0.0036) + (0.36*0.0576) =0.002304 +0.020736 = 0.023076

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