1. Expected return and standard deviation Aa Aa Wilson holds a two-stock portfol

Question

1. Expected return and standard deviation Aa Aa Wilson holds a two-stock portfolio that invests equally in Kelevra Industries and Old Glory Insurance Company (50% of his portfolio is in each stock). Each stock's expected return for the next year will depend on market conditions. The stocks' expected returns if there are poor, average, or great market conditions are shown below Market Kelevra Old Glory Condition Probability Industries Insurance Co Poor Average Great 0.25 0.50 0.25 -12% 14% 50% -2% 6% 14% What is the portfolio's expected return over the next year? 11.25% 10.25% O 9.00% 10.50% 9.50% What is the expected standard deviation of portfolio return? 13.47% 12.38% 13.85% 12.02% 11.67% What is the coefficient of variation (CV) for the portfolio's expected return? O 1.195 O 1.139 O 1.409 O 1.554 O 1.231

Explanation / Answer

expected return of K industries = 0.25 * -12% + 0.5 * 14% + 0.25 * 50%

= 16.5%

expected return of O industries = 0.25 * -2% + 0.5 * 6% + 0.25 * 14%

= 6%

expected return of portifolio

= 0.5 * 16.5% + 0.5 * 6%

= 11.25%

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