Given the following information, calculate the expected return and standard devi
ID: 2712998 • Letter: G
Question
Given the following information, calculate the expected return and standard deviation for a portfolio that has 45 percent invested in Stock A, 44 percent in Stock B, and the balance in Stock C. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
a. Expected return = ?
b. Standard deviation = ?
Returns State of Economy Probability of State of Economy Stock A Stock B Stock C Boom .70 14% 23% 24% Bust .30 15% 0% -15%Explanation / Answer
Portfolio return = Wa x Ra + WbxRb + WcxRc
state of economy
P
RA
RB
RC
Rp
Boom
0.7
0.14
0.23
0.24
0.14*.45 +0.23*0.44+0.24*.11=
0.1906
Burst
0.3
0.15
0
-0.15
0.15*.45 +0.0*0.44+0.24*-.11=
0.051
Expected return = Sum of P x R
state of economy
P
Rp
P x Rp
Boom
0.7
0.1906
0.13342
Burst
0.3
0.051
0.0153
14.87%
Hence expected portfolio return is 14.87%.
state of economy
P
Rp
Rp- ER
Px (R-ER)^2
Boom
0.7
0.1906
0.0419
0.001227754
Burst
0.3
0.051
-0.0977
0.00286476
variance
0.004092514
Variance = 0.004092514
Standard deviation = variance ^0.50
=
=6.40%
state of economy
P
RA
RB
RC
Rp
Boom
0.7
0.14
0.23
0.24
0.14*.45 +0.23*0.44+0.24*.11=
0.1906
Burst
0.3
0.15
0
-0.15
0.15*.45 +0.0*0.44+0.24*-.11=
0.051
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