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 .35 .21 .42 .30 Good .20 .14 .21 .12 Poor .30 .02 –.09 –.05 Bust .15 –.06 –.26 –.09

a. Your portfolio is invested 25 percent each in A and C, and 50 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

Variance of a Portfolio =

(Wa^2*Va) + (Wb^2*Vb) + (Wc^2*Vc) + (2*Wa*Wb*COVab) + (2*Wb*Wc*COVbc) + (2*Wa*Wc*COVac)

W = Weightage

V = Variance

COV = covariance

Variance of the portfolio = 0.10

Standard Dveviation of the Portfolio =Square root of variance = 5.11%

Returns Expected returns (Retrun 8 Probability) Probability A B C A B C Boom 0.35 0.21 0.42 0.3 0.0735 0.147 0.105 Good 0.2 0.14 0.24 0.12 0.028 0.048 0.024 Poor 0.3 0.02 -0.09 -0.05 0.006 -0.027 -0.015 Bust 0.15 -0.06 -0.26 -0.09 -0.009 -0.039 -0.0135 1 0.0985 0.129 0.1005

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.