Joan Summers Has $100,000 to Invest and Is Considering Two

question 121

Essay

Joan Summers has $100,000 to invest and is considering two alternatives. She can buy a risk free asset that will pay 10% or she can invest in a stock that has a 0.4 chance of paying 15%, a 0.3 chance of paying 18%, and a 0.3 chance of providing a 6% return. Joan plans to invest $70,000 in the stock and $30,000 in the risk free asset.
a. Determine the expected percentage return on the stock and the standard deviation.
b. Calculate the weighted average return on the portfolio, given the planned investment strategy outlined above.
c. Determine the standard deviation for the portfolio.
d. Write the equation that represents the budget line in the risk-return tradeoff. What is the slope of the budget line? Interpret this slope.

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Definitions:

Quantity Supplied

The amount of a commodity that producers are willing to sell at a particular price over a given period of time.

Supply

The total amount of a product or service that is available to consumers at a given price level.

Quantity Supplied

The volume of a commodity or service suppliers are prepared and able to market at a certain price.

Supply

The total amount of a good or service that is available for purchase at various price levels during a specified time period.