What is the standard deviation of the returns on a $30,000 portfolio which consists of stocks S and T? Stock S is valued at $12,000.
A)1.07 percent
B)1.22 percent
C)1.36 percent
D)1.49 percent
E)1.63 percent

Question

What is the standard deviation of the returns on a $30,000 portfolio which consists of stocks S and T? Stock S is valued at $12,000. 
A)1.07 percent 
B)1.22 percent 
C)1.36 percent 
D)1.49 percent 
E)1.63 percent

Quizplus · Accepted Answer

E(r)_Boom = [$12,000/$30,000] [0.11] + [($30,000 - $12,000)/$30,000] [0.05] = 0.074E(r)_Normal = [$12,000/$30,000] [0.08] + [($30,000 - $12,000)/$30,000] [0.06] = 0.068E(r)_Bust = [$12,000/$30,000] [-0.05] + [($30,000 - $12,000)/$30,000] [0.08] = 0.028E(r)_Portfolio = (0.05 F1F1F1S1F1F1F10 0.074) + (0.85 F1F1F1S1F1F1F10 0.068) + (0.10 F1F1F1S1F1F1F10 0.028) = 0.0643Var_Portfolio = [0.05 F1F1F1S1F1F1F10 (0.074 - 0.0643)²] + [0.85 F1F1F1S1F1F1F10 (0.068 - 0.0643)²] + [0.10 F1F1F1S1F1F1F10 (0.028 - 0.0643)²] = .000148111Std dev = F1F1F1S1F1F1F100.000148111 = 1.22 percent

What Is the Standard Deviation of the Returns on a $30,000