Q4 (25 marks)

Consider the following information:

Rate of Return if State Occurs

State ofEconomy

Probability of State ofEconomy

Stock A

Stock B

Stock C

Boom

0.65

0.07

0.15

0.33

Bust

0.35

0.13

0.03

0.06

Shape

What is the expected return on an equally weighted portfolio of these three stocks?

What is the variance of a portfolio invested 20% each in A and B and 60% in C?