Stock Q is expected to return 14 percent in a boom and 8 percent in a normal economy.Assume Stock R will return 11 percent in a boom and 10 percent in a normal economy.The probability of a boom is 13 percent.Otherwise,the economy will be normal.What is the standard deviation of a portfolio that is invested 48 percent in stock Q and 52 percent in stock R?
A)0.78%
B)1.42%
C)1.14%
D)0.67%
E)1.61%

Question

Quizplus · Accepted Answer

E(r)_Boom = 0.48(0.14)+ 0.52(0.11)= 0.1244 E(r)_Normal = 0.48(0.08)+ 0.52(0.10)= 0.0904 E(r)_Portfolio = 0.13(0.1244)+ 0.87(0.0904)= 0.09482 σ_Portfolio = {0.13[(0.1244 − 0.09482)²] + 0.87[(0.0904 − 0.09482)²]}^0.5 = 0.0114 or 1.14%

Stock Q Is Expected to Return 14 Percent in a Boom