Question

Use the information in the chart to answer the questions that follow

Individual	State 1 Return (p=0.3)	State 2 Return (p=0.5)	State 3 Return (p=0.2)
A	5%	11%	9%
B	6%	8%	-3%

Given the above information on two investments A and B, calculate the following statistics:

1. Calculate the Expected Return for A. Give your answer in decimal form to 3 decimals places. For example, 9% is 0.09.

2. Calculate the standard deviation for A. Give your answer in decimal form to 3 decimals places. For example, 9% is 0.09.

3. Calculate the Expected Return for B. Give your answer in decimal form to 3 decimals places. For example, 9% is 0.09.

4. Calculate the standard deviation for B. Give your answer in decimal form to 3 decimals places. For example, 9% is 0.09.

5. Assume that the expected return for A is 10% and the expected return for B is 5.5%. Calculate the expected return on a portfolio consisting of 60% A and 40% B. Give your answer in decimal form to 3 decimals places. For example, 9% is 0.09.

Answer 1

Probability	Return on Stock A	Return on Stock B	Probabilty * Square of (Returns of A - Mean Return of A)	Probabilty * Square of (Returns of B - Mean Return of B)
0.300	5.000%	6.000%	0.000433200000	0.0000192
0.500	11.000%	8.000%	0.000242000000	0.000392
0.200	9.000%	-3.000%	0.000000800000	0.0013448
Mean Return	8.800%	5.200%	2.600%	4.190%
	Formula of Mean Return:- Sum of all ( Probabilities of an outcome * Returns )	Formula of Standard Deviation:- Square root of [Sum of all { Probability of an Outcome * ( Mean Return - Returns )2 } ]

1. Expected Return for A= 8.800%

2. Standard Deviation for A= 2.600%

3. Expected Return for B= 5.200%

4. Standard Deviation for B= 4.190%

5.

Return on Stock A = 10%

Return on Stock B = 5.50%

Weight of Stock A = 0.6

Weight of Stock B = 0.4

Portfolio Expected Return = ( Weight of Stock A * Return on Stock A ) + ( Weight of Stock B * Return on Stock B )

Portfolio Expected Return = ( 0.6 * 10% ) + ( 0.4 * 5.50% )

Portfolio Expected Return = 8.200%