CH 13 Question 4 (of 4 value 0.00 points Consider the following information Rate

Question

CH 13 Question 4 (of 4 value 0.00 points Consider the following information Rate of Return if State Occurs State of Economy Boom Bust Probability of State of EconomyStock A 0.15 0.14 055 0 45 Stock B 0.22 0.04 Stock C 0.42 - 0.05 a. What is the expected return on an equally weighted portfolio of these three stocks? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Expected return b. What is the variance of a portfolio invested 24 percent each in A and B and 52 percent in C? (Do not round intermediate calculations and round your answer to 6 decimal places. (e.g 32.161616)) nande References eBook & Resources Worksheet Difficulty Basic w Esc SC F2 F3 F4 F5 F6 F7

Explanation / Answer

a). Solution :- Calculation of expected return on the portfolio consisting of stock A, stock B and stock C :-

Expected return on stock A = 0.55 * 0.15 + 0.45 * 0.14 = 0.1455 i.e., 14.55 %

Expected return on stock B = 0.55 * 0.22 + 0.45 * 0.04 = 0.1390 i.e., 13.90 %

Expected return on stock C = 0.55 * 0.42 + 0.45 * (-) 0.05 = 0.2085 i.e., 20.85 %

Expected return on portfolio = Expected return on stock A * Weight of stock A + Expected return on stock B * Weight of stock B + Expected return on stock C * Weight of stock C.

= 14.55 % * 1 / 3 + 13.90 % * 1 / 3 + 20.85 % * 1 / 3

= 4.85 % + 4.63 % + 6.95 %

= 16.43 % (approx).

Conclusion :- Expected return on portfolio consisting of stock A, stock B and stock C = 16.43 % (approx).

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