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What is the standard deviation of the portfolio? Rate of Return if State Occurs Stock State of Economy Probability of State o

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Answer #1

Return of the portfolio at Boom= 18%*25%+40%*30%+22%*45%=26.4%

Return of the portfolio at Bust=-6%*25%-30%*30%-5%*45%=-12.75%

Expected portfolio return= 45%*26.4%-55%*12.75%=4.86%

Hence, standard deviation=square root of 45%*(26.4%-4.86%)^2+55%*(-12.75%-4.86%)^2=19.47%

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