State of Economy Probability of State of Economy Rate of Return if state occurs

Question

State of Economy       Probability of State of Economy          Rate of Return if state occurs

                                                                                                Stock A     Stock B    Stock C

Boom                                          .15                                          .37              .47           .27

Good                                           .45                                          .22              .18            .11

Poor                                            .35                                         -.04              -.07          -.05

Bust                                             .05                                        -.18              -.22          -.08

Your portfolio is invested 20% each in stock A and C, and 60% in stock B. Given the analysis above the expected return of your portfolio is _______%, with a portfolio standard deviation of _________%.

Explanation / Answer

Expected return = 10.96%

Standard dev = 17.26%

p(x) return p*x p*(x - mean)^2 0.15 41.0% 0.0615 0.0135360 0.45 17.4% 0.0783 0.0018663 0.35 -6.0% -0.021 0.0100675 0.05 -18.4% -0.0092 0.004310048

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