QUESTION 1 Use the following table of states of the economy and stock returns to
ID: 2711530 • Letter: Q
Question
QUESTION 1
Use the following table of states of the economy and stock returns to calculate the percentage standard deviation of a portfolio of a portfolio of 80 percent Roten and the rest in Bradley.
Security
if State
Returns
Occurs
Prob of State of Economy
Roten
Bradley
Bust
0.2
-12%
30%
Boom
?
37
5
3 points
QUESTION 2
Use the following information to calculate the percentage expected return a portfolio that is 47.5 percent invested in 3 Doors, Inc., and the rest invested in Down Co.:
3 Dorrs, Inc.
Down Co.
Expected return
28%
5%
Standard deviation
35
11
Correlation
72
1 points
QUESTION 3
Use the following information to calculate the percentage standard deviation of a portfolio that is 61.4 percent invested in 3 Doors, Inc., and the rest invested in Down Co.:
3 Dorrs, Inc.
Down Co.
Expected return
16%
11%
Standard deviation
41
33
Correlation
0.76
Security
if State
Returns
Occurs
Prob of State of Economy
Roten
Bradley
Bust
0.2
-12%
30%
Boom
?
37
5
Explanation / Answer
Portfolio of 80% Roten and 20% Bradley
Economy Probability
Roten Bradley Total Return Deviation from Expected Value Squared Std Deviation
Bust 0.2 -9.60% 6.00% -3.60% -27.36% 7.49% 0.1368
Boom 0.8 30% 1.00% 30.60% 6.84% 0.47%
Expected Return= 23.76%
Portfolio of 80% Roten and 20% Bradley
Economy Probability
Roten Bradley Total Return Deviation from Expected Value Squared Std Deviation
Bust 0.2 -9.60% 6.00% -3.60% -27.36% 7.49% 0.1368
Boom 0.8 30% 1.00% 30.60% 6.84% 0.47%
Expected Return= 23.76%
2. Expected return=.475*28%+.525*5%=15.925%
3. Standard Deviation=.614*41+.386*33=37.912
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