Consider the following information: State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Boom Bust 0.62 0.38 0.09 0.20 Stock B 0.17 0.06 Stock C 0.35 -0.10 a. What is the expected return on an equally weighted portfolio of these three stocks? (Do not round intermediate calculations. Round the final answer to 2 decimal places.) Expected return % b. What is the variance of a portfolio invested 20% each in A and B and 60% in C? (Do not round intermediate calculations. Rour the final answer to 6 decimal places.) Variance
Consider the following information: State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Boom Bust 0.62 0.38 0.09 0.20 Stock B 0.17 0.06 Stock C 0.35 -0.10 a. What is the expected return on an equally weighted portfolio of these three stocks? (Do not round intermediate calculations. Round the final answer to 2 decimal places.) Expected return % b. What is the variance of a portfolio invested 20% each in A and B and 60% in C? (Do not round intermediate calculations. Rour the final answer to 6 decimal places.) Variance
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Consider the following information:
State of
Probability of
Economy
State of Economy
Boom
Bust
0.62
0.38
Rate of Return if State Occurs
Stock A
0.09
0.20
Stock B
0.17
0.06
Stock C
0.35
-0.10
6
a. What is the expected return on an equally weighted portfolio of these three stocks? (Do not round intermediate calculations.
Round the final answer to 2 decimal places.)
Expected return
%
b. What is the variance of a portfolio invested 20% each in A and B and 60% in C? (Do not round intermediate calculations. Roun
the final answer to 6 decimal places.)
Variance
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Step 1: Meaning of variance of portfolio
VIEWStep 2: Computation of expected return and standard deviation of each stock
VIEWStep 3: Computation of covariance and correlation coefficient
VIEWStep 4: a) Computation of expected return of equally weighted portfolio
VIEWStep 5: b) Computation of variance of portfolio
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