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You decide to invest in a portfolio consisting of 35 percent Stock A, 35 percent Stock...

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Finance

You decide to invest in a portfolio consisting of 35 percentStock A, 35 percent Stock B, and the remainder in Stock C. Based onthe following information, what is the expected return of yourportfolio? State of Economy Probability of State Return if StateOccurs of Economy

Stock A Stock B Stock C Recession .19 - 18.4 % - 3.7 % - 22.6 %Normal .53 10.6 % 8.3 % 16.9 % Boom .28 28.2 % 15.6 % 31.5 %

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4.5 Ratings (862 Votes)

Stock A:
Economy Probability Return
(P) ( R) (P) *(R )
Recession 0.19 -0.184 -0.03496
Normal 0.53 0.106 0.05618
Boom 0.28 0.282 0.07896
Expected return 0.10018
Expected return of Stock A: 10.02%
Stock B
Economy Probability Return
(P) ( R) (P) *(R )
Recession 0.19 -0.037 -0.00703
Normal 0.53 0.083 0.04399
Boom 0.28 0.156 0.04368
Expected return 0.08064
Expected Return of Stock B: 8.06%
Stock C
Economy Probability Return
(P) ( R) (P) *(R )
Recession 0.19 -0.226 -0.04294
Normal 0.53 0.169 0.08957
Boom 0.28 0.315 0.0882
Expected return 0.13483
Expected Return of Stock C: 13.48%
expected return of Portfolio
Exp Return weights Portfolio Return
StockA 10.02 0.35 3.507
StockB 8.06 0.35 2.821
Stock C 13.48 0.3 4.044
Portfolio return 10.37
Expected return of Portfolio = 10.37%
Answer is 10.37%

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Transcribed Image Text

You decide to invest in a portfolio consisting of 35 percentStock A, 35 percent Stock B, and the remainder in Stock C. Based onthe following information, what is the expected return of yourportfolio? State of Economy Probability of State Return if StateOccurs of EconomyStock A Stock B Stock C Recession .19 - 18.4 % - 3.7 % - 22.6 %Normal .53 10.6 % 8.3 % 16.9 % Boom .28 28.2 % 15.6 % 31.5 %

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