XYZ Investment Corporation Is Considering a Portfolio with 70% Weighting

question 227

Multiple Choice

XYZ Investment Corporation is considering a portfolio with 70% weighting in a cyclical stock and 30% weighting in 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 25%, 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) 0.00451
• B) 0.00351
• C) 0.00251
• D) 0.00151
• E) 0.00051

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Definitions:

Debt-To-Equity Ratio

A formula displaying the relative use of debt and equity from shareholders in the financial strategy for a company's assets.

Average Collection Period

calculates the average number of days it takes for a business to receive payments from its customers for invoices issued.

Times Interest Earned

A financial ratio that measures a company's ability to meet its debt obligations by comparing its income before interest and taxes to its interest expenses.

Debt-To-Equity Ratio

A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity.