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Consider the following information: State of Probability of State Economy of Economy Boom Bust 0
Consider the following information: State of Probability of State Economy of Economy Boom Bust 0.3 Rate of Return if State Occurs Stock A Stock B Stock C 0.07 0.02 0.25 0.11 0.19 -0.05 0.7 a) What is the expected return on an equally weighted portfolio of these three stocks? b) What is the variance of a portfolio invested in 25 percent each in A and B and 50 percent in C?
Expert Solution
1.
State Portfolio Returns
Boom =(0.07+0.02+0.25)/3=0.1133
Bust =(0.11+0.19-0.05)/3=0.0833
Expected returns=0.7*0.1133+0.3*0.0833=0.1043
2.
State Portfolio Returns
Boom =25%*0.07+25%*0.02+50%*0.25=0.1475
Bust =25%*0.11+25%*0.19+50%*(-0.05)=0.0500
Expected returns=0.7*0.1475+0.3*0.0500=0.11825
Variance=0.7*(0.1475-0.11825)^2+0.3*(0.0500-0.11825)^2=0.00200
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