Question

tate of the Economy		Probability of State of Economy		Rate of Return if State Occurs
Stock A			Stock B
Normal	0.82		0.12		0.14
Recession	0.18		-0.07		-0.10

You have a portfolio which is comprised of 45 percent of stock A and 55 percent of stock B.

e) What is the expected return for this portfolio (i.e., Stock A and Stock B)? Please interpret your answer.

f) What is the standard deviation for this portfolio (i.e., Stock A and Stock B)? Please interpret your answer.

Answer 1

0.45 0.55 Rate of Return If State Occurs Total*probability Total-Expected return Return weight d2*probability State of EXPECTED PORTFOLIO DEVIATIO Probability ТОTAL Economy Stock A Stock B B VARIANCE А N^2 В RETURN DEVIATION 0.82 0,001256832 0.12 0.054 0.10742 -0.01557 0.03915 0.001533 Normal 0.14 0.131 0.077 Recession -0.07 -0.17835 0.031809 0.00572557 0.006982403 0.18 -0.1 -0,0865 -0.0315 -0.055 0.09185 Expected return 0.09185 9.19% variance 0.0069824 0.0069824^(1/2) 0.083561 8.36% Standard Deviation