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 .55 .15 .22 .42 Bust .45 .14 .04 .05 a. What is the expected return on an equally weighted portfolio of these three stocks? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Expected return % b. What is the variance of a portfolio invested 24 percent each in A and B and 52 percent in C? (Do not round intermediate calculations and round your answer to 6 decimal places, e.g., 32.161616.) Variance

Explanation / Answer

a.    State probability A B C

   Boom 0.55 .15 .22 .42

   Bust 0.45 0.14 .04 -.05

expected return of portfolio = probability * Weighted expected return from the state of economy

Weighted expected return of each state of economy :

Boom = (0.15 + 0.22 + 0.42 )/ 3 =0.26

   Bust = ( 0.14 + 0.04 - 0.05) /3 =0.043

   Expected return of portfolio =( 0.26 * 0.55 ) + (0.043 * 0.45)

   = 14.3% + 1.94%

   = 16.24%

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