Consider the following information: Rate of Return if State Occurs State of Prob
ID: 2629331 • Letter: C
Question
Consider the following information: Rate of Return if State Occurs State of Probability of Economy State of Economy Stock A Stock B Stock C Boom 0.25 0.37 0.47 0.27 Good 0.50 0.21 0.18 0.12 Poor 0.20 0.05 0.08 0.05 Bust 0.05 0.15 0.33 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? (Round your answer to 2 decimal places. (e.g., 32.16)) Expected return % b-1 What is the variance of this portfolio? (Do not round intermediate calculations and round your answer to 5 decimal places. (e.g., 32.16161)) Variance b-2 What is the standard deviation? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Standard deviation %
Explanation / Answer
State
Stock A
Stock B
Stock C
Return = 0.25*A + 0.5*B + 0.25*C
Probability
Boom
0.37
0.47
0.27
0.3950
0.25
Good
0.21
0.18
0.12
0.1725
0.5
Poor
-0.05
-0.08
-0.05
-0.0650
0.2
Bust
-0.15
-0.33
-0.1
-0.2292
0.05
Expected Return = 0.25*0.3950 + .. +0.05*-0.2292 = 0.1605 = 16.05%
Variance = 0.25*[0.3950]2 + .. +0.05*[-0.2292]2
State
Stock A
Stock B
Stock C
Return = 0.25*A + 0.5*B + 0.25*C
Probability
Boom
0.37
0.47
0.27
0.3950
0.25
Good
0.21
0.18
0.12
0.1725
0.5
Poor
-0.05
-0.08
-0.05
-0.0650
0.2
Bust
-0.15
-0.33
-0.1
-0.2292
0.05
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