fiona has three investments opportunities. she can invest in 3-month t-bill, lar
ID: 2802978 • Letter: F
Question
fiona has three investments opportunities. she can invest in 3-month t-bill, large company stocks, and small company stock. she diversifies her investment on an equally-weighted portfolio (puts 33.33% (1/3) of her money into each asset). a. what is the expected return (payoff) of her portfolio? b. what is the standard deviation of her portfolio? c. an investor, Mr. white, recommend her to visit all of her money into large company stocks. do you agree
states of econmy probabilty of the states 3-month T-Bill large company stock small company stock boom 0.3 3 12 30 steady 0.5 3 6 18 recession 0.2 3 0 9Explanation / Answer
Avg return in boom state (as it is an equally weighted portfolio) = (3+12+30)/3 = 15
Avg return in steady state (as it is an equally weighted portfolio) = (3+6+18)/3 = 9
Avg return in recession state (as it is an equally weighted portfolio) = (3+0+9)/3 = 4
Standard deviation = Square root (Variance) = 3.89
C) Pay off from investing only in large company stock = (0.3)*12+(0.5)*6+(0.2)*0 = 6.6
This is less than the earlier payoff from the equal weighted portfolio.
So, I don't agree with her recommendation
Probability avg return Deviation from expected value Squared Boom 0.30 15.00 5.20 27.04 Steady 0.50 9.00 (0.80) 0.64 Recession 0.20 4.00 (5.80) 33.64 9.80 15.16 (Expected return is the weighted avg) (Variance is the weighted average of probability column with squared column)Related Questions
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