State Probability Return on A Return on B Boom .6 0.15 0.08 Bust .4 0.05 0.20 Us
ID: 2721296 • Letter: S
Question
State Probability Return on A Return on B
Boom .6 0.15 0.08
Bust .4 0.05 0.20
Using the table above, what is the expected return for Stock A? What is the standard deviation for Stock A (Note: Use 7 decimal places to calculate the variance.)? what is the expected return on the portfolio if you invest $7,000 in Stock A and $3,000 in Stock B? what is the standard deviation of the portfolio if you invest $7,000 in Stock A and $3,000 in Stock B (Note: Use 7 decimal places to calculate the variance.)?
Explanation / Answer
Answer: Expected return for Stock A=(0.15*0.6)+(0.05*0.4)=0.11
Variance for Stock A=[*0.6(0.15-0.11)^2+(0.05-0.11)^2*0.4]
=[0.00096+0.00144]
=0.0024
SD for Stock A=[0.0024]1/2
=0.04898
Expected Return on stock B=(0.08*0.6)+(0.20*0.4)=0.128
Variance for Stock B=[*0.6(0.08-0.128)^2+(0.20-0.128)^2*0.4]
=[0.0013824+0.0020736]
=0.003456
SD for Stock B=[0.003456]1/2
=0.05878
ER (p)=0.11*(7000/10000)+0.128*(3000/10000)
=0.077+0.0384=0.1154
SD (p)=[(7000/10000)*0.04898+(3000/10000)0.05878]
=0.034286+0.017634
=0.05192
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