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Investment Portfolio Analysis Consider the possible rates of return that you might earn next year on...

Investment Portfolio Analysis
Consider the possible rates of return that you might earn next year on a $50,000 investment in
stock A or on a $50,000 investment in stock B, depending upon the states of the economy: recession, normal, and prosperity.

For stock A:
State of Economy Return (ri) Probability (pi)
Recession -5% 0.2
Normal 20% 0.6
Prosperity 40% 0.2

For stock B:
State of Economy Return (ri) Probability (pi)
Recession 10% 0.2
Normal 15% 0.6
Prosperity 20% 0.2

What is the expected rate of return (r) for stocks A and B?
Which stock would you invest in? Explain.

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Answer #1

✓ Expected rate of return on stock A is 19 %

✓ Expected rate of return on stock B is 15 %

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