Intro The table below shows the expected rates of return for three stocks and their weights in some portfolio: Stock A Stock B Stock C 0.4 0.2 0.4 Portfolio weights Probability State Expected returns Recession 0.3 0.03 0.02 -0.03 Normal 0.5 0.06 0.06 0.04 Boom 0.2 0.11 0.08 0.12 Part 1 |Attempt 2/10 for 10 pts. What is the expected portfolio return? 0.0488 Correct The portfolio return in each state is the weighted average of the individual expected returns: E(rp, recession) = wa E(ra, recession) + WB E(ro, recession) + WC Erc, recession) = 0.4 * 0.03 + 0.2 * 0.02 +0.4* -0.03 = 0.004 = E(rp, normal) = WA E(ra, normal) + WB Erb, normal) + wc Elrc, normal) = 0.4 * 0.06 + 0.2 * 0.06 + 0.4 * 0.04 = 0.052 E(rp, boom) = WA E(ra, boom) + WB Elrb, boom) + WC Erc, boom) = 0.4 * 0.11 + 0.2 * 0.08 + 0.4 * 0.12 = 0.108 The expected portfolio return is the weighted average of the portfolio returns during a recession and a boom: E(rp) = Precession E(rp, recession) + Pnormal E(rp, normal) + Pboom Erp, boom) = 0.3 * 0.004 + 0.5 * 0.052 + 0.2 * 0.108 = 0.0488 Attempt 1/10 for 10 pts. Part 2 What is the standard deviation of the portfolio returns? 4+ decimals Submit