Author Question: Use the information in the table to calculate the expected return and standard deviation of an ... (Read 51 times)

Melani1276 · **on:** Jul 10, 2018

Use the information in the table to calculate the expected return and standard deviation of an equally-weighted portfolio.

What will be an ideal response?

Question 2

Altria Group Inc. (ticker: MO on NYSE) is an American manufacturer of tobacco products. Selected Financial information for Altria is provided in the table below. What is the expected return on shares of Altria using the SML?

Asset Expected Return Beta
Altria 0.5
Risk Free Asset 5 0
Market Portfolio 10 1

A) 5.0
B) 7.5
C) 10.0
D) 12.5
E) 15

maaaaaaaaaa · **Reply #1 on:** Jul 10, 2018

Answer to Question 1

Answer: Expected Return = 7.00; standard deviation = 0.33
Explanation: To find the expected return for an equally-weighted portfolio, first find the expected return in each state via the formula E(rs) = (ri)/n. For the boom state the expected return is 6.67, Normal = 6.67, and Bust period expected return = 7.33. The expected return for the portfolio = E(rp) = (rs) probability of the state of the world = (6.67 .20) + (6.67 .30) + (7.33 .50) = 7.00.
The standard deviation = (rs - E(r))2 probabilitys(1/2) = (6.67 - 7.00)2 .20 +(6.67 - 7.00)2 .30 + (7.33 - 7.00)2 .50(1/2) = 0.33.

Answer to Question 2

B