Question

calculate the ERp and STDp- assuming weights of 30%, 40% and 30% in stocks A, B, and C. Also, what range of returns would you expect to see 95% of the time. Assuming a normal distribution and your mean whats the ERp? Economy Probability ETF A ETF B ETF C Good .30 .25 .20 .10 Normal .45 .15 .10 .05 Poor .25 .05 -.05 .10

Answer 1

Good Scenario

Expected return of portfolio in Good scenario = (30% × 25%) + (40% × 20%) + (30% × 10%)

  = 7.50% + 8.00% + 3.00%

= 18.50%

Expected return of portfolio in Good scenario is 18.50%.

Normal Scenario

Expected return of portfolio in Normal scenario = (30% × 15%) + (40% × 10%) + (30% × 5%)

   = 4.50% + 4.00% + 1.50%

    = 10.00%

Expected return of portfolio in Normal scenario is 10.00%.

Poor Scenario

Expected return of portfolio in Poor scenario = (30% × 5%) + (40% × -5%) + (30% × 10%)

   = 1.50% - 2.00% - 3%

= 2.50%

Expected return of portfolio in Poor scenario is 2.50%.

Now,

Expected return and standard deviation of portfolio is calculated in excel and screen shot provided below:

Expected return of portfolio is 10.68% and standard deviation of portfolio is 6.34%.