Consider the following information: Your portfolio is invested 35 percent each i

Question

Consider the following information:

Your portfolio is invested 35 percent each in A and C, and 30 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.)

What is the standard deviation? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Rate of Return if State Occurs State of Probability of Economy State of Economy Stock A Stock B Stock C   Boom .25 .19 .35 .28   Good .15 .14 .13 .14   Poor .10 .00 –.10 –.05   Bust .50 –.20 –.28 –.13

Explanation / Answer

Expected Return of portfolio = 1.7%

Rate of Return if State Occurs State of Probability of Portfolio % Weighted Return Expected return Weighted return^2*Probability Economy State of Economy Stock A Stock B Stock C    Stock A Stock B Stock C    Stock A   Stock B Stock C    Stock A   Stock B Stock C    Stock A   Stock B Stock C      Boom            0.25         0.19         0.35         0.28         0.35           0.30               0.35 0.0665 0.105 0.098         0.017         0.026         0.025      0.0011      0.0002      0.0024   Good            0.15         0.14         0.13         0.14         0.35           0.30               0.35 0.049 0.039 0.049         0.007         0.006         0.007      0.0004      0.0002      0.0004   Poor            0.10             -        (0.10)       (0.05)         0.35           0.30               0.35 0 -0.03 -0.0175                -        (0.003)      (0.002)                -        0.0001    0.00003   Bust            0.50      (0.20)      (0.28)       (0.13)         0.35           0.30               0.35 -0.07 -0.084 -0.0455      (0.035)      (0.042)      (0.023)      0.0025      0.0035      0.0010 Total      (0.011)      (0.013)         0.007      0.0039      0.0040      0.0038 Total Total expected ret=      (0.017) Total =      0.0118

Expected Return of portfolio = 1.7%

Variance = Sum of Weighted Return^2*probability -Mean^2                   = 0.0118-0.000289                      =     0.01151 So variance =     0.01151 Standard deviation = Sq root of variance = Sq root of 0.01151 So std deviation of portfolio =10.72%

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