An Investment Firm Is Considering a Portfolio with Equal Weighting

question 355

Multiple Choice

An investment firm is considering a portfolio with equal weighting in a cyclical stock and a countercyclical stock. It is expected that there will be three economic states; Good, Average and Bad, each with equal probabilities of occurrence. The cyclical stock is expected to have returns of 12%, 5% and 1% in Good, Average and Bad economies respectively. The countercyclical stock is expected to have returns of -8%, 2% and 14% in Good, Average and Bad economies respectively. Given this information, calculate portfolio variance.

• A) .00094
• B) .00084
• C) .00074
• D) .00064
• E) .00054

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Definitions:

Sales

The revenue earned from selling goods or services over a period of time.

Useful Information

Data or facts that are accurate, timely, and relevant, enabling effective decision-making or action.

Constraint

A constraint refers to a limitation or restriction that affects the planning, execution, or outcome of a project or process.

Accounting

The systematic process of recording, summarizing, and analyzing financial transactions of a business.