Question

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%

Answer 1

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