Stock Q will return 18 percent in a boom and 9 percent in a normal economy.Stock R will return 9 percent in a boom and 5 percent in a normal economy.There is a 75 percent probability the economy will be normal.What is the standard deviation of a portfolio that is invested 40 percent in stock Q and 60 percent in stock R?
A).78%
B)1.41%
C)2.60%
D)6.67%
E)8.01%

Question

Quizplus · Accepted Answer

E(r)_Boom = (.40 × .18)+ (.60 × .09)= .126E(r)_Normal = (.40 × .09)+ (.60 × .05)= .066E(r)_Portfolio = (.25 × .126)+ (.75 × .066)= .081Var_Portfolio = [.25 × (.126 - .081)²] + [.75 × (.066 - .081)²] = .000675Std dev = √.000675 = .0260,or 2.60%

Stock Q Will Return 18 Percent in a Boom and 9