Question

Consider the following information:

  

		Rate of Return if State Occurs
State of Economy	Probability of State of Economy	Stock A	Stock B	Stock C
Boom	0.70	0.33	0.17	0.27
Bust	0.30	0.13	0.15	-0.05

  

Requirement 1:

What is the expected return on an equally weighted portfolio of these three stocks? (Do not round your intermediate calculations.)

(Click to select)20.27%22.77%32.30%35.07%14.54%

  

Requirement 2:

What is the variance of a portfolio invested 20 percent each in A and B and 60 percent in C? (Do not round your intermediate calculations.)

(Click to select)0.0193960.0116960.0196960.0151960.017196

Answer 1

			Rate of Return if State Occurs
	State of Economy	Probability of	Stock A	Stock B	Stock C
		State of Economy
	Boom	0.7	0.33	0.17	0.27
	Bust	0.3	0.13	0.15	-0.05
	Expected return = (Wa x Ra + Wb x Rb + Wc x Rc)x Prob of Boom + (Wa x Ra + Wb x Rb + Wc x Rc) x Prob of bust
Req 1	In case of boom	(0.33+0.17+0.27)/3	0.256667	x 0.7	0.179667
	In case of bust	(0.13+0.15+-0.05)/3	0.076667	x 0.3	0.023
	Expected return on equally weighted portfolio				20.27%	Option A
Req 2	Expected return with 20% in A and B and 60% in C
	In case of boom	0.20(0.33)+0.20(0.17)+0.60(0.27)			0.2620	x 0.7	0.1834
	In case of Bust	0.20(0.13)+0.20(0.15)+0.60(-0.05)			0.0260	x 0.3	0.0078
	Expected return on 20% (A/B) and 60%(C) portfolio						0.1912
	Variance of portfolio = Prob of Boom(boom return - Exp Ret)^2 + Prb of bust(Bust return - Exp Ret)^2
	Variance of portfolio		.70(0.2620 − 0.1912)^2 + .30(.0260 − .1912)^2
			1.1696%	Option B