The economy has a 14 percent chance of booming.Otherwise,the economy will be normal.Stock G will return 15 percent in a boom and 8 percent in a normal economy.Stock H will return 9 percent in a boom and 6 percent in a normal economy.What is the variance of a portfolio consisting of $2,500 of stock G and $7,500 of stock H?

Question

Quizplus · Accepted Answer

Portfolio value $2,500 + 7,500 = $10,000E(r)_Boom = [$2,500/($10,000 × .15)] + [$7,500/($10,000 × .09)] = .105E(r)_Normal = [$2,500/($10,000 × .08)] + [$7,500/($10,000 × .06)] = .065E(r)_Portfolio = (.14 × .105)+ (.86 × .065)= .0706Var_Portfolio = [.14 × (.105 - .0706)²] + [.86 × (.065 - .0706)²] = .000193

The Economy Has a 14 Percent Chance of Booming