Question

You bought shares of stock from Tesla, Target, and Toyota. You feel like every year in the future will be randomly either "spectacular" or "depressing".

  

		Rate of Return if State Occurs
State of Economy	Probability of State of Economy	Stock of Tesla	Stock of Target	Stock of Toyota
Spectacular	0.70	0.09	0.21	0.21
Depressing	0.30	0.13	0.09	0.15

  

Requirement 1:

If you bought an equally weighted portfolio of Tesla, Target, and Toyota shares, what return would you expect to receive every year on your stock investment? (Do not round your intermediate calculations.)

(Click to select)  15.60%  18.10%  27.63%  30.40%  9.87%

  

Requirement 2:

What do you expect the variance of your portfolio returns to be, if you invested 10 percent of your money in Tesla's shares, same proportion in Target's shares, and 80 percent in Toyota's shares? (Do not round your intermediate calculations.)

(Click to select)  0.008659  0.004159  0.006159  0.008359  0.000659

rev: 09_20_2012, 10_19_2015_QC_CS-21001, 03_30_2016_QC_C

Answer 1

weighted return state of economy asla 070 Spectacular Depressing rate of return if state occurs (weight x return) weighted sum probability expected return Stock Tesla Stock Target Stock Toyota Stock Tesla Stock Target Stock Toyota (sum of weighted return) 0.09 0.21 0.21 3.000% 7.000% 7.000% 17.000% 0.70 11.90% 0.13 0.09 0.15 4.333% 3.000% 5.000% 12.333% 0.30 3.70% 15.60% 33.33% 33.33% 33.33% Weight Answer: Expected return = 15.60%][if equally weighted]