Use the following information to answer the questions. a. What is the expected r

Question

Use the following information to answer the questions.

a. What is the expected return of each asset?

b. What is the variance and the standard deviation of each asset?

c. what is the expected return of a portfolio with 9% in asset J, 51% in asset K, and 40% in asset L?

d. What is the portfolio's variance and standard deviation using the same asset weights from part (c)?

State of Economy Probability of State Return on Asset J in State Return on Asset K in State Return on Asset L in State Boom 0.25 0.065 0.240 0.260 Growth 0.36 0.065 0.120 0.180 Stagnant 0.24 0.065 0.030 0.090 Recession 0.15 0.065 -0.110 -0.200

Explanation / Answer

c).

EXp return of portfolio = .09*.065+.51*.0939+.40*.1214 = .102299 = 10.2299%

d).

Portfolio variance =

Exp return of portfolio in boom = .09*.065+.51*.24+.40*.26 = .23225

Exp return of portfolio in Growth = .09*.065+.51*.12+.40*.18 = .13905

Exp return of portfolio in Stagnant .09*.065+.51*.03+.40*.09 = .05715

Exp return of protfolio in Recession = .09*.065-.51*.11-.40*.2 = -.13025

variance of portfolio = (.25*(.23225-.102299)^2)+(.36*(.13905-.102299)^2)+(.24*(.05715-.102299)^2)+(.15*(-.13025-.102299)^2)

= .0133

SD of portfolio =.0133^.5 = .1153 = 11.53%

State of Economy Probability of State Return on Asset J in State Return on Asset K in State Return on Asset L in State Boom 0.25 0.065 0.24 0.26 Growth 0.36 0.065 0.12 0.18 Stagnant 0.24 0.065 0.03 0.09 Recession 0.15 0.065 -0.11 -0.2 Exp return 0.065 0.0939 0.1214 variance 0 0.012798 0.02177 SD 0 0.113127 0.147547

Related Questions

Navigate

• Browse (All)
• Browse U
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.