Question

You decide to invest in a portfolio consisting of 17 percent Stock X, 50 percent Stock Y, and the remainder in Stock Z. Based on the following information, what is the standard deviation of your portfolio?

State of Economy	Probability of State			Return if State Occurs
	of Economy
				Stock X			Stock Y			Stock Z
Normal		.76			10.40%			3.80%			12.80%
Boom		.24			17.70%			25.70%			17.20%

Multiple Choice 8.50% 3.40% 2.55% 7.28% 5.83%

Answer 1

Ans:- In this question, we need to find the SD of the portfolio. For that first, we need to find the individual SD of X, Y, and Z.

Standard Deviation (SD) is nothing but the Square root of Variance.

Stock X

Stock Y

Stock Z

SD of the Portfolio will be given by 0.17 * SDx + 0.50 * SDy + 0.33 * SDz

= 0.17 * 3.12% + 0.50 * 9.35% + 0.33 * 1.88% = 5.83%.

Therefore the SD of the Portfolio will be 5.83%. option (e) is the right answer.

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