apter 12&13 Assignment Question 11 (of 15) 10.00 points Consider the following i

Question

apter 12&13 Assignment Question 11 (of 15) 10.00 points Consider the following information Rate of Retum if State Oocurs Stock C State of Economy 0.68 Stock A 0.31 0.15 Stock B 0.11 of Economy Probability of 0.25 0.11 What is the expected return on an equaly weighted portfolio of these three stocks? (Do not round your (Click to select What is the variance of a portlolio invested 10 percent each in A and B and 80 peroent in C? (Do not round your intermediate calculations) Cick to seleet) eBook &Resources; MacBook Air 2 3 4.

Explanation / Answer

1.

Expected return of each state of economy:

Boom = (0.31 + 0.11 + 0.25) / 3 = 0.2233 or 22.33%

Bust = (0.15 + 0.07 + 0.11)/3 = 0.11 or 11%.

Expected return = 0.68 * 0.2233 + 0.32 * 0.11

= 0.1518 + 0.0352

= 0.187 or 18.7%.

2.

Boom = 0.1 * 0.31 + 0.1 * 0.11 + 0.8 * 0.25

= 0.031 + 0.011 + 0.2

= 0.242 or 24.2%.

Bust = 0.1 * 0.15 + 0.1 * 0.07 + 0.8 * 0.11

= 0.015 + 0.007 + 0.088

= 0.11 or 11%.

Expected return = 0.68 * 0.242 + 0.32 * 0.11

= 0.16456 + 0.0352

= 0.19976 or 19.976%.

Variance = 0.68 (0.242 - 0.19976)2 + 0.32 (0.11 - 0.19976)2

= 0.00121326 + 0.00257819

= 0.00379145.

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