Question

# State Probability Return on Security A Return on Security B Boom .6 13% 20% Bust .4...

 State Probability Return on Security A Return on Security B Boom .6 13% 20% Bust .4 -4.5% 3%

What is the expected return on Security A?

A. 4.25%

B. 9.6%

C. 6.0%

D. 12.1 %

E. -1.5

What is the standard deviation of Security A

A. 8.6 %

B. 0.7%

C. 4.2%

D. 8.8%

What is the expected return on Security B

A. 8.8%

B. 9.7%

C. 7.2%

D. 13.2%

E. 11.5%

What is the expected return on a portfolio composed of 25% in Security B

A. 11.9%

B. 9.7%

C. 6.1%

D. 14.5%

E. 11.4%

 Sec A Scenario Probability Return% =rate of return% * probability Actual return -expected return(A)% (A)^2* probability Boom 0.6 13 7.8 7 0.00294 Bust 0.4 -4.5 -1.8 -10.5 0.00441 Expected return %= sum of weighted return = 6 Sum=Variance Sec A= 0.00735 Standard deviation of Sec A% =(Variance)^(1/2) 8.57
 Sec B Scenario Probability Return% =rate of return% * probability Boom 0.6 20 12 Bust 0.4 3 1.2 Expected return %= sum of weighted return = 13.2
 Expected return%= Wt Sec A*Return Sec A+Wt Sec B*Return Sec B Expected return%= 0.25*6+0.75*13.2 Expected return%= 11.4

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