There are two assets and two states of the economy. State of Economy Probability of State Rate of...

Question:

There are two assets and two states of the economy.

State of EconomyProbability of StateRate of Return of Stock ARate of Return of Stock B
Recession0.60-10%15%
Boom0.4030%-5%

Suppose you have $30,000 in total. If you put $9,000 in Stock A and the remainder in Stock B, what will be the expected return and standard deviation on your portfolio?

Portfolio Weight, Return and Variance

Expected return on a portfolio is calculated as the weighted average of the expected returns of the stocks which comprise the portfolio. The weights represent the proportion of the portfolio invested in the stocks.Standard deviation of the portfolio measures how each possible return deviates from the expected return.

Answer and Explanation:

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  • Percentage of stock A in the portfolio = 9000 / 30,000 = 0.30

Percentage of stock B in the portfolio = 21,000 / 30,000 = 0.70

  • Return on portfolio...

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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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