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    Expected return and standard deviation

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    Problem 1 (Chapter 13) Please use the following information to answer the following questions.

    State Probability Return on A Return on B
    Boom .65 0.30 0.05
    Bust .35 0.10 0.20

    What is the expected return for security A? __________________

    What is the expected return for security B? __________________

    What is the expected return for a portfolio that is 70% invested in A and 30% invested in B? __________

    What is the standard deviation of security A? __________________

    What is the standard deviation of security B? __________________

    What is the standard deviation of a portfolio with one-quarter of the funds in A and the remainder of the funds in B? __________________

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    Solution Preview

    State Probability Return on A Return on B
    Boom .65 0.30 0.05
    Bust .35 0.10 0.20

    What is the expected return for security A? __________________

    Expected return = Sum (Probability X return)
    = 0.65X0.3 + 0.35X0.1 = 23%

    What is the expected return for security B? __________________

    Expected return = ...

    Solution Summary

    The solution explains how to calculate the expected return and standard deviation for individual securities and for a portfolio

    $2.49

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