Question

What is the variance of the returns on a portfolio comprised of $4,200 of Stock G and $5,300 of Stock H?

State of Economy	Probability of State of Economy	Rate of Return If State Occurs Stock G, Stock H
Boom	0.18	0.18, 0.08
Normal	0.82	0.14, 0.11

Multiple Choice .000248 .001324 .000209 .000000 .000168

Answer 1

	Here we first need to compute weight of each stock in the portfolio:
	Weight = amount invested in stock / total amount
	Weight of G = 4200 / (4200+5300)
		0.442105
	Weight of H = 5300 / (4200+5300)
		0.557895
	Portfolio return = sum of weight x return
	Portfolio return (boom) = 0.18 x 0.442105 + 0.08 x 0.557895
			0.1242105
	Portfolio Return (Normal) =0.14 x 0.442105 + 0.11 x 0.557895
	= 0.086		0.12326315
	State	P	Rp	P x Rp	Rp - ER (Rp-0.12343)	P x (Rp - ER)^2
	Boom	0.18	0.1242105	0.02236	0.00078	0.00000010862
	Normal	0.82	0.1232632	0.10108	-0.0002	0.00000002384
			ER	0.12343		0.00000013247
	Variance = sum of P x (Rp - ER)^2
	Variance =		0.00000013247
	Answer is B)