Consider the following information: Rate of Return If State Occurs State of Econ
ID: 2791028 • Letter: C
Question
Consider the following information: Rate of Return If State Occurs State of Economy Boom Good Poor Bust Probability of State of Economy 0.15 0.45 0.35 0.05 Stock A Stock B 0.362 0.462 0.132 0.112 0.022 0.032 -0.122 -0.262 Stock C 0.342 0.182 -0.068 -0.102 Requirement 1: Your portfolio is invested 32 percent each in A and C and 36 percent in B. What is the expected return of the portfolio? (Do not include the percent sign (%). Enter rounded answer as directed, but do not use the rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Expected return of the portfolio Requirement 2: (a) What is the variance of this portfolio? (Enter rounded answer as directed, but do not use the rounded numbers in intermediate calculations. Round your answer to 5 decimal places (e.g., 32.16161).) Variance of the portfolio (b) What is the standard deviation of this portfolio? (Do not include the percent sign (%). Enter rounded answer as directed, but do not use the rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Standard deviationExplanation / Answer
Requirement : 1 ER(Boom) (0.362*0.32)+(0.462*0.36)+(0.342*0.32)= 0.3916 ER(Good) (0.132*0.32)+(0.112*0.36)+(0.182*0.32)= 0.1408 ER(Poor) (0.022*0.32)+(0.032*0.36)+(-0.068*0.32)= -0.0032 ER(Bust) (-0.122*0.32)+(-0.262*0.36)+(-0.102*0.32)= -0.166 ER(Portfolio)= 0.3632 Prob.*ER(Boom)+p*ER(Good)+p*ER(Poor)+p*ER(Bust)= 36.32% (0.15*0.3916)+(0.45*0.1408)+(0.35*-0.0032)+(0.05*-0.166)= 0.11268 ie. 11.27% Requirement : 2 a. Variance(Portfolio)= (0.15*(0.3916-0.11268)^2)+(0.45*(0.1408-0.11268)^2)+(0.35*(-0.0032-0.11268)^2)+(0.05*(-0.166-0.11268)^2)= 0.020608 2.06% b. Standard deviation of the Portfolio = Sq.rt.of 0.020608 0.143556 14.36%
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