Your analysis of outcomes for sales and the associated rate of return on common

Question

Your analysis of outcomes for sales and the associated rate of return on common stocks for companies X and Y are shown below. You intend to form a portfolio by allocating 45% of your funds in Company X, and the remainder in Company Y.

probability       ROR for X       ROR for Y      

declining                          35%                -1.0 %                6.3% flat                                   35                   10.7                  18.9 rising                                30                   18.9                 -16.0

What is the expected return and standard deviation of portfolio returns?

Select one:

a. The portfolio E(R) is 6.29% and the standard deviation is 44.61%

b. The portfolio E(R) is 5.98% and the standard deviation is 44.61%

c. The portfolio E(R) is 6.29% and the standard deviation is 6.68%

d. The portfolio E(R) is 5.23% and the standard deviation is 3.86%

e. The portfolio E(R) is 5.98% and the standard deviation is 6.68%

Explanation / Answer

Return

=6.29

The correct answer is c. c. The portfolio E(R) is 6.29% and the standard deviation is 6.68%

Probbility ROR for X ROR forY 35% -1 -0.35 6.3 2.205 35% 10.7 3.745 18.9 6.615 30% 18.9 5.67 -16 -4.8 9.065 4.02 9.065*45% 4.02*55% 4.07 2.211

Return

4.07+2.211

=6.29

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