Question

The return on shares of Valley Transporter is predicted under the following various economic conditions: Recession -0.12 Normal +0.09 Boom +0.20 If each economy state has the same probability of occurring, what is the variance of the stock?

The return on shares of the Orange Company are predicted under the following states of nature. The states of nature are all equally likely, and because there are a total of three states, each state has a 33.333% chance of occurring.

Recession -0.11
Normal +0.05
Boom +0.24

What is the standard deviation of Orange?

Toyota Corp.'s stock is $32 per share. Its expected return is 24% and variance is 12%. Honda Corp.'s stock is $20 per share. Its expected return is 19% and variance is 7%. Benz Corp.'s stock is $45 per share. Its expected return is 12% and variance 7%. What would be the expected return of a portfolio consisting of 50% Toyota and 50% Honda?

Answer 1

Variance of a stock = (

Standard Deviation = Square root of variance

Portfolio Expected Return = R1W1 + R2W2

Where R1 and R2 are expected return of security 1 and security 2

and W1 and W2 are weights of security 1 and security 2.

Valley Transporter
State	Probability	Returns	RxP	R-E(R )	[R-E(R )]^2	[R-E(R )]^2 * P
Recession	0.33	-0.12	-0.0396	-0.0957	0.00915849	0.003022302
Normal	0.33	0.09	0.0297	-0.0264	0.00069696	0.000229997
Boom	0.33	0.2	0.066	0.0099	9.801E-05	3.23433E-05
		E (R )	0.0561		Sum (Variance)	0.003284642

Orange Company
State	Probability	Returns	RxP	R-E(R )	[R-E(R )]^2	[R-E(R )]^2 * P
Recession	0.33333	-0.11	-0.0366663	-0.09277	0.008605586	0.0028685
Normal	0.33333	0.05	0.0166665	-0.03943	0.001555001	0.000518328
Boom	0.33333	0.24	0.0799992	0.023899	0.000571172	0.000190389
		E (R )	0.0599994		Sum (Variance)	0.003577217
					Standard Deviation	0.059809843

Company	Weight	Expected Return	Portfolio Expected Return
Toyota	0.5	24	W1R1+ W2R2
Honda Corp.	0.5	19	21.5