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Problem 13 A late penalty of 54% will apply to new answers. Intro The table below shows the expected rates of return for three stocks
Problem 13 A late penalty of 54% will apply to new answers. Intro The table below shows the expected rates of return for three stocks and their weights in some portfolio: Stock A Stock C 0.4 0.4 State Portfolio weights Probability 0.1 0.5 Stock B 0.2 Expected returns 0.03 0.07 Recession -0.06 0 0.03 Normal 0.01 Boom 0.4 0.08 0.09 0.09 18 | Attempt 2/5 for 1.3 pts. Part 1 What is the expected portfolio return? 4.76% Correct The portfolio return in each state is the weighted average of the individual expected returns: E(Rp, recession) = WA E(RA, recession) + Wg E(RB, recession) + Wc E(Rc, recession) = 0.4*0+ 0.2 * 0.03 +0.4*-0.06 = -0.018 E(Rp, normal) = WA E(RA, normal) + WB E(RB, normal) + Wc E(Rc, normal) = 0.4 * 0.03 +0.2 * 0.07 + 0.4 * 0.01 = 0.03 E(Rp, boom) = WA E(RA, boom) + Wg E(RB, boom) + WC E(Rc, boom) = 0.4 * 0.08 + 0.2 0.09 + 0.4 * 0.09 = 0.086 The expected portfolio return is the weighted average of the portfolio returns during a recession and a boom: E(Rp) = Precession (Rp, recession) + Pnormal E(Rp, normal) + Pboom E(Rp, boom) = 0.1 * -0.018 + 0.5 * 0.03 +0.4 * 0.086 = 0.0476 Part 2 - Attempt 1/5 for 2.3 pts. What is the standard deviation of the portfolio returns? 4+ decimals Submit
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