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Consider the following information about three stocks: State of Economy Probability of Rate of...

Question:

Consider the following information about three stocks:

State of Economy Probability of Rate of Return if State Occurs Stock A Stock B Stock C
Boom 0.3 0.2 0.25 0.60
Normal 0.45 0.15 0.11 0.05
Bust 0.25 0.01 -0.15 -0.50

(a). What are the expected returns and standard deviations of Stocks A, B, and C?

(b). If your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the portfolio expected return? The standard deviation?

Expected Rate of Return and Standard Deviation:

Expected return and standard deviation are two statistical measures that defines the characteristic of the portfolio. Higher the standard deviation, higher will be the expected return and so will be the risk of the portfolio and vice versa.

Answer and Explanation:

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Sub part a:

Expected return is calculated using the formula:

  • Expected return of stock = Probability of (Boom) * Returns at (Boom) + Probability of...

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Portfolio Weight, Return & Variance: Definition & Examples

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Chapter 12 / Lesson 1
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A portfolio can be designed in several different ways. It is important to understand the basics of a portfolio before building and managing one. In this lesson, we will go over the weight, return, and variance of a portfolio.


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