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Question 3 You wish to form an investment portfolio, and have three assets to choose from, a high-risk asset A, and medium-risk asset B, and

Question 3

You wish to form an investment portfolio, and have three assets to choose from, a high-risk asset A, and medium-risk asset B, and a zero-risk asset C.

The returns per $1,000 invested for each of these assets in each of three possible economic conditions is give in the table below:

Asset A

Asset B

Asset C

Recession (P=0.2)

-$170

-$40

$30

Normal (P=0.5)

$10

$90

$30

Expansion (P=0.3)

$210

$140

$30

  1. What is the expected return and variance of returns for each asset?
  2. What is the expected return and variance of returns for a portfolio that invests $600 in A, $300 in B, and $100 in C?
  3. If the economic forecast changes such that there is now a 35% chance of recession, a 50% chance of a normal economy and only a 15% chance of expansion, determine the new expected return for the same investments as in Part 2.

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