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 19.57 % 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

Answer:

Answer:a

Stock A= (0.35*0.21)+(0.20*0.14)+(0.30*0.02)+(0.15*-0.06)=9.85%

Stock B=(0.35*0.42)+(0.20*0.21)+(0.30*-0.09)+(0.15*-0.26)=12.3%

Stock C=(0.35*0.30)+(0.20*0.12)+(0.30*-0.05)+(0.15*-0.09)=10.05%

ER(p)=0.25*9.85%+0.50*12.3%+0.25*10.05%=11.125%

Answer:b-1

Variance=[0.25*(9.85%-11.125%)2+0.50*(12.3%-11.125%)2+0.25*(10.05%-11.125%)2]

=1.38563%

Answer:b-2 Sd=Square root of variance

=1.18%

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