Connect FINANCE SEC TI Question 3 (of 80) 3 Consider the following information e

Question

Connect FINANCE SEC TI Question 3 (of 80) 3 Consider the following information eof Probabilty of State Rate of Return r State Occurs Stock B 04 20 of Econormy Stock A Stock C Boom Bust 67 14 05 a. What is the expected return on an equally weighted porttolio of these three stocks? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decima Expected return 1 % b. What is the variance of a portfolio invested 22 percent each in A and B and 56 percent in C? (Do not round intermediate calculations and round your answer to 5 decimal places, e-g. 32 16161.) Variance of a portfolio l places, e g. 3216.)

Explanation / Answer

a. return of equally weighted portfolio in boom= (1/3)*10 +(1/3)*4 +(1/3)*25 = 13%

return of equally weighted portfolio in bust= (1/3)*14 +(1/3)*20 +(1/3)*(-5) = 9.67%

expected return = 0.67 * boom return + 0.33*bust return = 0.67*13 + 0.33*9.67 = 11.90%

b.return of portfolio in boom = 0.22*10 + 0.22*4 + 0.56*25 = 17.08

return of portfolio in boom = 0.22*14 + 0.22*20 + 0.56*(-5) = 4.68

expected return = 0.67 * boom return + 0.33*bust return = 0.67*17.08 + 0.33*4.68 = 12.99%

variance = 0.67*(0.1708-0.1299)2 +0.33(0.1708-0.0468)2 = 0.0061948

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