U ezto.mheducation.com/hm.tpx connect Ross, Fundamentals of Corporate Finance, 1

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U ezto.mheducation.com/hm.tpx connect Ross, Fundamentals of Corporate Finance, 11e Demo Course: Summer 2018 FIN 3000 Section INANCE Chapter 13 Homework instructions I help Question 14 (of 21) Save& Exit Submit value 1.19 points Consider the following information Rate of Retun If State Occurs State ofProbability of Economy State of Economy Boom Good Poor Bust Stock A Stock B 42 20 .32 17) .04 25 -.05 09 -.07 a. Your portfolio is invested 28 percent each in A and C, and 44 percent in B. What is the expected return of the portfolio? (Do not round intermediate calculaitons. Enter your answer as a percent rounded to 2 decimal places, e.g. 32.16) Expected return11.43 b-1 What is the variance of this portfolio? (Do not round intermediate calculations and round your answer to 5 decimal places, e.g., 32.16161.) b-2 What is the standard deviation? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g. 32.16.) Standard deviations Hints References eBook & Resources Hint#1 24/2018

Explanation / Answer

Boom:

Expected Return = 28% * 0.32 + 44% * 0.42 + 28% * 0.22
Expected Return = 0.336

Good:

Expected Return = 28% * 0.17 + 44% * 0.13 + 28% * 0.11
Expected Return = 0.1356

Poor:

Expected Return = 28% * (-0.04) + 44% * (-0.07) + 28% * (-0.05)
Expected Return = -0.056

Bust:

Expected Return = 28% * (-0.12) + 44% * (-0.17) + 28% * (-0.09)
Expected Return = -0.1336

Answer a.

Expected Return = 0.20 * 0.336 + 0.50 * 0.1356 + 0.25 * (-0.056) + 0.05 * (-0.1336)
Expected Return = 0.1143
Expected Return = 11.43%

Answer b.

Variance = 0.20 * (0.336 - 0.1143)^2 + 0.50 * (0.1356 - 0.1143)^2 + 0.25 * (-0.056 - 0.1143)^2 + 0.05 * (-0.1336 - 0.1143)^2
Variance = 0.02038

Answer c.

Standard Deviation = (0.02038)^(1/2)
Standard Deviation = 0.1428
Standard Deviation = 14.28%

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