# Book 6 Vol 1 Exam 3 am

Good afternoon, For those of you using Schweser, I’m having a hard time with Vol 1 Exam 3 am question #24. The explanation given to me by Schweser does not show much calculations and for some reason I’m having a hard time calculating it. Can anyone show me how it’s done? I’d be most appreciative. Cheers

post the q?

An analyst develops the following information for two stocks. 50% of the funds are invested in each stock Scenario 1 Scenario 2 Scenario 3 Probability .5 .3 .2 Rate of return Stock A 25% 10% -25% Stock B 1% -5% 35% The expected return and the variance of this two-stock porfolio are closest to: Expected Return Variance a) 8.25% 23.31% b) 8.25% 48.90% c) 10.50% 23.31% d) 10.50% 48.09%

You have to calculate the portfolio returns for the each scenario with equal weights. When you do that, you get 13% (.25x.5 + .01x.5), 2.5% (.1x.5 + -.05x.5), and 5% (-.25x.5 + .35x.5). Then you calculate the portfolio expected return [(.13 x .5) + (.025 x .3) + (.05 x .2) = 8.25% and variance using the scenario weights = [0.5(13 – 8.25)^2 + 0.3(2.5 – 8.25)^2 + 0.2(5 – 8.25)^2] = 23.31.

Thanks, I finally understand!