Please write out all the necssary steps/ formulas. Thank you! A portfolio is inv
ID: 2802205 • Letter: P
Question
Please write out all the necssary steps/ formulas. Thank you!
A portfolio is invested 40 percent in stock A, 30 percent in stock B, and 30 percent in stock C. What is the expected return and standard deviation of this portfolio?
State of Probability of Rate of Return if State Occurs
Economy State of Economy Stock A Stock B Stock C
Boom .10 .05 .16 .23
Normal .70 .08 .09 .11
Recession .20 .15 -.03 -.25
Explanation / Answer
State of Probability of Economy State of Economy Stock A Stock B stock C Boom 0.1 0.05 0.16 0.23 Good 0.7 0.08 0.09 0.11 Poor 0 0 0 0 Bust 0.2 0.15 -0.03 -0.25 weight 0.4 0.3 0.3 return 0.091 0.073 0.05 weight * return 0.0364 0.0219 0.015 E(X) 7.33% weight * return^2 0.0033124 0.0015987 0.00075 E(X^2) 0.0056611 variance 0.00029 standard deviation 1.70%