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question 1

a) Your fund manager suggests that you invest in portfolio below with the weight as follows: 25 percent in Stock L, 30 percent in stock N and 45 percent in stock S. Before agree to invest in this portfolio, you would like her to come out with the risk of this portfolio. Help the fund manager to calculate the standard deviation of this portfolio

i) Calculate the expected return for the portfolio

ii) Calculate the standard deviation for the portfolio

(Economic Condition)	(Probability)	(Rate of return if state occurs)
		(Stock L)	(Stock N)	(Stock S)
(Boom)	0.25	0.25	0.25	0.45
(Good)	0.25	0.10	0.13	0.11
(Poor)	0.25	0.03	0.05	0.05
(Recession)	0.25	-0.04	-0.09	-0.09

b) The returns on both a portfolio of common stocks and portfolio of treasury bills are contingent on the state of the economy, as shown below:

Keadaan ekonomi (Economic Condition)	Kebarangkalian (Probability)	Pulangan pasaran (Market Return)	Bil Perbendaharaan (Treasury Bills)
Meleset (Recession)	0.25	-8.2%	3.5%
Biasa (Normal)	0.5	12.3%	3.5%
Berkembang (Boom)	0.25	25.8%	3.5%

i) Calculate the expected returns on the Treasury bills and on the markets

ii) Calculate the expected risk premium

c) Discuss the difference between beta as a measure of risk and variance as a measure of risk

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