5. A portfolio is invested 40% in stock A, 30% in stock B, and 30% in stock C. A

Question

5.

A portfolio is invested 40% in stock A, 30% in stock B, and 30% in stock C. Assuming that the returns are normally distributed, what is the 68% probability range of returns for any given year?

State of    Probability of                     Rate of Return if State Occurs     

Economy State of Economy       Stock A             Stock B            Stock C

Boom                0.10                    0.05                  0.16                    0.23

Normal              0.70                    0.08                  0.09                    0.11

Recession          0.20                    0.15                 -0.03                -0.25

4.12% to 15.18%

2.29% to 12.37%

4.99% to 18.67%

3.68% to 13.89%

1.69% to 8.34%

4.12% to 15.18%

2.29% to 12.37%

4.99% to 18.67%

3.68% to 13.89%

1.69% to 8.34%

Explanation / Answer

c.4.99% to 18.67%

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