Question

P13-10 Returns and Standard Deviations (LO1) Consider the following information: Rate of Return if State Occurs Probability of State of Economy Stock A .35 .30 State of Economy Boom Good Poor Bust .30 Stock B .40 .10 .04 -07 .11 .03 Stock C .33 .12 .05 -9.95 .13 27 -03 Requirement 1: Your portfolio is invested 22 percent each in A and C, and 56 percent in B. What is the expected return of the portfolio? (Do not round your intermediate calculations. Note: All rates are given in decimal format here!) (Click to select) Requirement 2: (a) What is the variance of this portfolio? (Do not round your intermediate calculations.) (Click to select) (b) What is the standard deviation? (Do not round your intermediate calculations.) (Click to select)

Answer 1

K3 - A K LM X Fox =H3-$J$8 B C D E F G H I Weighted returns if Expected Rate of returns if state occurs portfolio Probability state occurs (WeightxReturn) return (o) [(Pc)] А В С Т А Т в с 35% 40% 33% 7.70% 22.40% 7.26% 37.36% 0.30 11% 10% 12% 2.42% 5.60% 2.64% 10.66% 0.30 3% 4% 5% 0.66% 2.24% 1.10%| 4.00% 0.13 -3% -7% -9.95% -0.66% -3.92% -2.19% -6.77% 0.27 J Expected return [rxP(n)=u] State of 1 economy r- (r-u)^2 P(c)x(r-u)^2 2 3 Boom 4 Good 5 Poor 6 Bust 7 8 Weights 11.21% 24.26% 3.20% -2.44% 0.52% -9.10% -1.83% -19.87% 5.89% 0.06% 0.83% 3.95% 1.77% 0.02% 0.11% 1.07% 22% 56% 22% Expected return 13.10% Variance (o^2) 0.02957 Standard deviation (o) 17.20%