Question

IncorrectQuestion 6

0 / 1 pts

Use the following information:

	Probability	w1	w2	w3
state1	0.3333333	15.00%	8.00%	3.00%
state2	0.3333333	9.00%	5.00%	8.00%
state3	0.3333333	12.00%	7.00%	4.00%
% wealth invested		33.3333%	33.3333%	33.3333%

What is the expected standard deviation on the portfolio made up of all three assets over the next period?

  

between .60% and .70%

  

between .55% and .60%

  

greater than .80%

  

less than .55%

Answer 1

	Probability	w1	w2	w3	Return	Standard Deviation
State 1	0.333333	15%	8%	3%	8.67%	6.03%
State 2	0.333333	9%	5%	8%	7.33%	2.08%
State 3	0.333333	12%	7%	4%	7.67%	4.04%
% wealth invested		33.33%	33.33%	33.33%

We calculated the average return of each state by multiplying the weights returns and percent of the wealth invested. eg: For State 1, Return is calculated as 15% * 33.33% + 8% * 33.33% + 3% * 33.33% = 8.67%

In the similar way, we calculated standard deviation by using stdev.s function and taking different weights returns into account.

Calculating Correlations between State 1 and 2, State 2 and 3, State 1 and 3 using excel function:

Corr(State 1 and 2)= 0.3321

Corr(State 2 and 3)= 0.3764

Corr(State 1 and 3)= 0.9989

For 3-asset portfolios, Expected Standard Deviation can be calculated using the formula:

Putting all the values, Portfolio(Std Dev) = 4.25%