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A.3. The following table shows the expected returns from investing in assets A and B in three possible future scenarios (S=1,S=2 and S=3), as well
A.3. The following table shows the expected returns from investing in assets A and B in three possible future scenarios (S=1,S=2 and S=3), as well as the probabilities of each scenario occurring. (a) At a glance, which asset seems to offer a higher return? Which seems more risky? (b) Compute the expected return of each asset and the variance and standard deviation of the returns and compare the estimates to your expectations. (c) If the risk free asset in this economy offers a 2% rate of return, which is the expected return of a portfolio that invests 50% in A and 50% in B. (d) Compute the expected return of a portfolio with 30% invested in asset A, 40% invested in asset B and the remainder invested in the risk-free asset. (e) Compute the risk (standard deviation) of the previous portfolios
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