Reference no: EM133061560
Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of the economy when both the securities and the economic states have unequal weights?
-Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero.
-Given the unequal weights of both the securities and the economic states, the standard deviation of the portfolio must equal that of the overall market.
-The weights of the individual securities have no effect on the expected return of a portfolio when multiple states of the economy are involved.
-Changing the probabilities of occurrence for the various economic states will not affect the expected standard deviation of the portfolio.
-The standard deviation of the portfolio will be greater than the highest standard deviation of any single security in the portfolio given that the individual securities are well diversified.
If the economy booms, Walmart's stock is expected to return 19 percent. If the economy falls into a recession, the stock's return is projected at 5 percent. The probability of a boom is 80 percent while the probability of a recession is 20 percent. What is the variance of the returns on this stock?
A. .003136
b. .006727
c. .009864
d. .010192
e. .013328
The returns on the common stock of Target Corporation are quite cyclical. In a boom economy, the stock is expected to return 27 percent in comparison to 13 percent in a normal economy and a negative 20 percent in a recessionary period. The probability of a recession is 30 percent while the probability of a boom is 5 percent. The remainder of the time the economy will be at normal levels. What is the standard deviation of the returns on this stock?
a. 11.40 percent
b. 14.79 percent
C. 15.87 percent
d. 18.27 percent
e. 22.46 percent
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