Question

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

Ans:-(a) Expected return for A is 8.80% i.e 0.088

(b) Standard deviation of A is 2.6% i.e 0.026

(c) Expected return of B is 5.2% i.e 0.052

(d) Standard deviation of B is 4.2% i.e 0.042

(5) If the Expected return of A and B is 10% and 5.5%, then the expected return on a portfolio consisting of 60% in A and 40% in B would be given by

= Er1*W1+Er2*W2, where Er is the expected returns, and W is the weights.

= 10% * 0.60 + 5.5% * 0.40 = 8.20% = 0.082.