A portfolio consists of 40 percent of Stock S and 60 percent of Stock T.Stock S will return 13 percent if the economy booms and 8 percent if it is normal.Stock T will return 6 percent in a boom and 10 percent in a normal economy.The probability of a boom is 50 percent.What is the portfolio variance?
A).001014
B).000004
C).000040
D).001004
E).000009

Question

Quizplus · Accepted Answer

E(r)_Boom = (.40 × .13)+ (.60 × .06)= .088E(r)_Normal = (.40 × .08)+ (.60 × .10)= .092E(r)_Portfolio = (.50 × .088)+ (.50 × .092)= .09Var_Portfolio = [.50 × (.088 - .09)²] + [.50 × (.092 - .09)²] = .000004

A Portfolio Consists of 40 Percent of Stock S and 60