save & Exit || submit Question 4 for 9) Time remaining: 1:15:44 2000 points Cons

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save & Exit || submit Question 4 for 9) Time remaining: 1:15:44 2000 points Consider the following information Rtle of Return If State Occurs State of Probability of of Economy Stock A Stock B Stock C 17 05 -09 15 50 25 10 45 10 02 -11-25 35 12 01 Good Poor Bust Requirement 1: Your portiolio is invested 30 percent each in A and C and 40 percent in B. What is the expected return of the portfolio? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16)) Expected return of the portfolio Requirement 2: (a) What is the variance of this portfolio? (Do not round 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 round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Standard deviation Hints References eBook & Resources.

Explanation / Answer

Expected return is the weighted average of individual returns

Expected return of portfolio in Boom = 0.3*0.35 + 0.3*0.33 + 0.4*0.45 = 0.384

Expected return of portfolio in Good = 0.3*0.12+0.3*0.17+0.4*0.1 = 0.127

Expected return of portfolio in Poor = 0.3*0.01+0.3*-0.05+0.4*0.02 = -0.004

Expected return of portfolio in Bust = 0.3*-0.11 + 0.3*-0.09 + 0.4*-0.25 = -0.16

Average return = 0.15*0.384 + 0.5*0.127 + 0.25*-0.004 + 0.1*-0.16 = 0.1041 = 10.41%

B - Variance is the sum of squared deviations from the mean times the probability

Variance = 0.15 * (0.1041-0.384)^2 + 0.5*(0.1041-0.127)^2 + 0.25*(0.1041+0.004)^2 + 0.1*(0.1041+0.16)^2 = 0.02191

C - Std dev = sqrt(Variance)

Stdev = (0.02191)^(1/2) = 0.1480 = 14.80%

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