What is the expected return on an equally weighted portfolio of these three stoc

Question

  

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))

  

What is the variance of a portfolio invested 15 percent each in A and B and 70 percent in C? (Do not round intermediate calculations and round your answer to 6 decimal places. (e.g., 32.161616))

  State of Probability of   Economy State of Economy Stock A Stock B Stock C   Boom 0.60 0.09 0.18 0.36   Bust 0.40 0.15 0.07 ? 0.05

Explanation / Answer

a)
return when economy in boom = 0.6 * (1/3*0.09 +1/3* 0.18 + 1/3* 0.36) = 0.126

return when economy in Bust = 0.4 * 1/3 * (0.15 + 0.07 - 0.05) = 0.02267

expected return = 0.126 + 0.02267 = 14.87%

b)

when in boom

rp = (0.15*0.09 +0.15* 0.18 + 0.7* 0.36) = 0.2925

when in bust

rp = (0.15 * 0.15 + 0.15 * 0.07 - 0.7 * 0.05) = -0.002

return of portifolio = 0.6 * 0.2925 + 0.4 * -0.002 = 0.1747

variance of portifolio

= 0.6 * (0.2925 -0.1747 )^2 + 0.4 * (-0.002 -0.1747)^2

= 0.020815

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