Consider the following probability distribution for stocks A and B: $\begin{array}{cccc}
\text { State } & \text { Probability } & \text { Return on Stock A } & \text { Return on Stock B } \
1 & 0.15 & 8 \% & 8 \% \
2 & 0.20 & 13\% & 7\% \
3 & 0.15 & 12\%& 6\% \
4 & 0.30 & 14\%& 9\% \
5 & 0.20 & 16\% & 11 \%
\end{array}$

If you invest 35% of your money in A and 65% in B, what would be your portfolio's expected rate of return and standard deviation?
A) 9.9%; 3%
B) 9.9%; 1.1%
C) 10%; 1.7%
D) 10%; 3%

Question

Consider the following probability distribution for stocks A and B: $\begin{array}{cccc}
\text { State } & \text { Probability } & \text { Return on Stock A } & \text { Return on Stock B } \
1 & 0.15 & 8 \% & 8 \% \
2 & 0.20 & 13\% & 7\% \
3 & 0.15 & 12\%& 6\% \
4 & 0.30 & 14\%& 9\% \
5 & 0.20 & 16\% & 11 \%
\end{array}$

If you invest 35% of your money in A and 65% in B, what would be your portfolio's expected rate of return and standard deviation?
A) 9.9%; 3%
B) 9.9%; 1.1%
C) 10%; 1.7%
D) 10%; 3%

Quizplus · Accepted Answer

The expected rate of return is calculated by taking the weighted average of the returns in each state. The standard deviation is calculated by finding the square root of the weighted average of the squared deviations from the expected return.

Consider the Following Probability Distribution for Stocks a and B