Use the information in the table to calculate the expected return and standard deviation of an equally-weighted portfolio
What will be an ideal response?
Answer: Expected Return = 7.00%; standard deviation = 0.33%
Explanation: To find the expected return for an equally-weighted portfolio, first find the expected return in each state via the formula E(rs) = (Σri)/n. For the boom state the expected return is 6.67%, Normal = 6.67%, and Bust period expected return = 7.33%. The expected return for the portfolio = E(rp) = (Σrs) ∗ probability of the state of the world = (6.67% ∗ .20) + (6.67 ∗ .30) + (7.33% ∗ .50) = 7.00%.
The standard deviation = [Σ(rs - E(r))2 ∗ probabilitys](1/2) = [(6.67% - 7.00%)2 ∗ .20 +(6.67% - 7.00%)2 ∗.30 + (7.33% - 7.00%)2 ∗ .50](1/2) = 0.33%.
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