Question

(13-3) You want to assess the expected return and risk of your portfolio, which contains three stocks. You are basing your assessment on a simple forward-looking model based on three states of the world. The weights in your portfolio are 25% in Stock A, 45% in Stock B and 30% in Stock C. Your assessment of the probable returns of these three stocks in the states of the world are given in the table below. Boom Normal Bust Prob 0.20 0.60 0.20 Stock A 0.12 0.05 -0.06 Stock B 0.18 0.06 0.11 Stock C 0.03 0.07 0.02 Calculate the expected return and standard deviation of your portfolio based on these assumptions.

Answer 1

0.25 0.45 0.3 Weight Rate of Return If State Occurs State of Return weight Probability А в Economy Boom Normal Bust 02 0.6 0.2 Stock A Stock B 0.121 0.18 0.05 0.06 -0.061 -0.11 Stock C 0.031 0.07 0.02 0.03 0.0125 -0.015 0.081 0.027 -0.0495 0.009 0.021 0.006 Total*probability Total-Expected return d^2*probability Expected Portfolio Deviatio TOTAL Return Deviation n^2 VARIANCE 0.12 0.024 0.0714 0.005098 0.001019592 0.0605 0.0363 0.0119 0.000142 0.000084966 -0.0585 -0.0117 -0.1071 0.01147 0.002294082 0.0486 0.00339864 4.86% Expected return variance standard deviation(variance^(1/2)) 0.0486 0.00340 5.83% 0.00340^(1/2)