Question

Consider the following probability distribution for stocks C and D: State Probability Expected Return Stock C Expected Return Stock D 1 .2 19% -9% 2 .5 11% 14% 3 .2 -16% 26% 4 .1 -30% 40% If you invest 25% of your money in C and 75% in D, what would be your portfolio's expected rate of return?

Group of answer choices none of the answers are correct

1. 11.58%

2.14.40%

3.5.93%

4. 9.27%

Answer 1

Answer : Correct Option is (1.)11.58%

Calculation of Expected Return of C

Expected Return of C= Sum of [Probability * Expected Return]

= [0.20 * 19%] + [0.50 * 11%] + [0.20 * (-16%)] + [0.10 * (-30%)]

= 3.8% + 5.5% - 3.2% - 3%

= 3.1%

Expected Return of D= Sum of [Probability * Expected Return]

= [0.20 * (-9%)] + [0.50 * 14%] + [0.20 * 26%] + [0.10 * 40%]

= -1.8% + 7% + 5.2% + 4%

= 14.4%

Portfolio Expected Return = [Expected Return of C * Weight of C] + [Expected Return of D * Weight of D]

= [3.1% * 0.25] + [14.4% * 0.75]

= 0.775% + 10.8%

= 11.575% or 11.58%