Consider the following information: State of Economy Probability of State of Economy Boom Bust .71 .29 .09 .18 .03 .24 Rate of Return if State Occurs Stock A Stock B Stock C .29 -.09 a. What is the expected return on an equally weighted portfolio of these three stocks? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. b. What is the variance of a portfolio invested 26 percent each in A and B and 48 percent in C? Note: Do not round intermediate calculations and round your answer to 5 decimal places, e.g., .16161. a. Expected return 12.89 % b. Variance of portfolio
Consider the following information: State of Economy Probability of State of Economy Boom Bust .71 .29 .09 .18 .03 .24 Rate of Return if State Occurs Stock A Stock B Stock C .29 -.09 a. What is the expected return on an equally weighted portfolio of these three stocks? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. b. What is the variance of a portfolio invested 26 percent each in A and B and 48 percent in C? Note: Do not round intermediate calculations and round your answer to 5 decimal places, e.g., .16161. a. Expected return 12.89 % b. Variance of portfolio
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 6P
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Concept explainers
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:Consider the following information:
State of Economy
Boom
Bust
Probability of State of Economy
.71
.29
.09
.18
Rate of Return if State Occurs
Stock A Stock B Stock C
.03
.29
.24
-.09
a. What is the expected return on an equally weighted portfolio of these three stocks?
Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.
b. What is the variance of a portfolio invested 26 percent each in A and B and 48 percent in C?
Note: Do not round intermediate calculations and round your answer to 5 decimal places, e.g., .16161.
a. Expected return
b. Variance of portfolio
12.89%
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