The probability of the economy booming is 24 percent.Otherwise,the economy will be normal.Stock G is expected to return 19 percent in a boom and 12 percent in a normal economy.Stock H is expected to return 9 percent in a boom and 8 percent in a normal economy.What is the variance of a portfolio consisting of $3,800 of stock G and $7,400 of stock H?

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Quizplus · Accepted Answer

Portfolio value $3,800 + $7,400 = $11,200 E(r)_Boom = 0.19($3,800 / $11,200)+ 0.09($7,400 / $11,200)= 0.1239 E(r)_Normal = 0.12($3,800 / $11,200)+ 0.08($7,400 / $11,200)= 0.0936 E(r)_Portfolio = 0.24(0.1239)+ 0.76(0.0936)= 0.1009 σ²_Portfolio = 0.24(0.1239 − 0.1009)² + 0.76(0.0936 − 0.1009)² = 0.000168

The Probability of the Economy Booming Is 24 Percent