Share
Explore BrainMass

Calculating expected return of a portfolio

Problem:

Rate of Return if State Occurs
State of Economy Probability of State of Econ Stock A Stock B Stock C
Boom 0.30 0.30 0.45 0.33
Good 0.40 0.12 0.10 0.15
Poor 0.25 0.01 -0.15 -0.05
Bust 0.05 -0.06 -0.30 -0.09

1. How do I calculate the expected return on this portfolio if it invested 30% each in Stocks A and C and 40% in Stock B?

2. Also, please help me find the variance of the portfolio as well as the standard deviation. Thank you so much!

Attachments

Solution Preview

Please refer attached file for better clarity of tables and formulas.

Solution:

State of Economy Rate of Return if State ccurs Potrfolio's
Probability Stock A % allocation Stock B % allocation Stock C % allocation Weighted return

Boom 0.30 0.30 30% 0.45 40% 0.33 30% 0.369
Good 0.40 0.12 30% 0.10 ...

Solution Summary

The following solution describes the steps for calculating expected returns and standard deviation of a portfolio.

$2.19