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.