Question
Economic Return on Asset Conditions Probability A B C Boom .30 60% 50% 10% Normal .40 40 30 50 Bust .30 20 10 90 Portfolio
Economic Return on Asset
Conditions Probability A B C
Boom .30 60% 50% 10%
Normal .40 40 30 50
Bust .30 20 10 90
Portfolio AB is formed by investing 50% of the funds in each of the assets A and B. A similar (equally weighted) portfolio has also been created from A and C, called AC. Find the rates of return not given for AB and AC.
Econ AB= AC=
Conditions Probability .50A+.50B .50A+.50C
Boom .30 55 35%
Normal .40 35 ?
Bust .30 15 ?
Find the expected return and standard deviation of AB and AC. (The formulas are given in 1 above.) Do you see any evidence of risk reduction from the numbers you obtain? What do you think caused this?
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