Info

10% 8

45

20% 0

13.75% 5.00

Ross et al.: Fundamentals I V. Risk and Return I 13. Return, Risk, and the I I © The McGraw-Hill of Corporate Finance, Sixth Security Market Line Companies, 2002

Edition, Alternate Edition

CHAPTER 13 Return, Risk, and the Security Market Line 423

The portfolio return when the economy booms is calculated as:

The return when the economy goes bust is calculated the same way. The expected return on the portfolio is 8.5 percent. The variance is thus:

a2 = .40 X (.1375 - .085)2 + .60 X (.05 - .085)2 = .0018375

The standard deviation is thus about 4.3 percent. For our equally weighted portfolio, check to see that the standard deviation is about 5.4 percent.

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