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   .40     .18     .40     .29
Good   .25     .15     .22     .11
Poor   .30     .01     –.09     –.06
Bust   .05     –.07     –.24     –.09

a.  
Your portfolio is invested 20 percent each in A and C, and 60 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

a. Your portfolio is invested 20 percent each in A and C, and 60 percent in B. What is the expected return of the portfolio?

Solution-

Boom: E(Rp) = .20(.18) + .60(.40) + .20(.29) = 0.334 or 33.4%

Good:    E(Rp) = .20(.15) + .60(.22) + .20(.11) = .184 or 18.4%

Poor:    E(Rp) = .20(.01) + .60(

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