Consider the following information: Rate of Return if State Occurs State of Prob

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   .25     .20     .48     .23
Good   .15     .14     .20     .11
Poor   .20     –.05     –.13     .00
Bust   .40     –.13     –.33     –.11

a.  
Your portfolio is invested 40 percent each in A and C, and 20 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. Omit the "%" sign in your response.)

Expected return   %

b-1.   What is the variance of this portfolio? (Do not round intermediate calculations. Round your answer to 5 decimal places.)

Variance of this portfolio  

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   %

Explanation / Answer

Investment Economy State of Economy Stock A Stock B Stock C Total Return Expected Return Boom 0.25 0.20 0.48 0.23 0.910 0.228 Good 0.15 0.14 0.20 0.11 0.450 0.068 Poor 0.20 -0.05 -0.13 0.00 -0.180 -0.036 Bust 0.40 -0.13 -0.33 -0.11 -0.570 -0.228 1.000 0.160 0.220 0.230 0.610 0.031 Expected Return 3.10% Formula ( Return -Expected Return )Square X State of Economy Boom 0.879 0.773 0.19316 Good 0.419 0.176 0.02633 Poor -0.211 0.045 0.00890 Bust -0.601 0.361 0.14448 Variance of Portfolio 0.37288 Formula Squre Root of Variance Standard Deviation 61%

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