Assume that you formed a portfolio by investing 15000 in Ban

Assume that you formed a portfolio by investing $15,000 in Bank America and $10,000 in the S&P; 500. Below is information on three \"states of nature\" and the return that you would see over the next year from each security in each state of nature. What will be the variance of returns for your portfolio? Bank of America S&P; 500 .06 .12 .18 Probability of \"state\" 1/3 1/3 1/3 .16 -.08 28 a. 0104 O b 0096 C. .0113 d. 0144 e\" ,0084

Solution

Option B

Probability of state Portfolio returns
1/3 =15000/25000*0.16+10000/25000*0.06=0.12
1/3 =15000/25000*(-0.08)+10000/25000*0.12=0.0
1/3 =15000/25000*0.28+10000/25000*0.18=0.24

Mean returns=1/3*0.12+1/3*0.00+1/3*0.24=0.12

Variance=1/3*(0.12-0.12)^2+1/3*(0.00-0.12)^2+1/3*(0.24-0.12)^2=0.0096