Question

What is the expected return of an equally weighted portfolio comprised of the following three stocks?...

What is the expected return of an equally weighted portfolio comprised of the following three stocks?

State of

Economy

Probability of

State of Economy

Rate of Return

if State Occurs

Stock A

Stock B

Stock C

Boom

.25

.19

.13

.07

Normal

.72

.15

.05

.13

Bust

.03

−

.29

−

.14

.22
A.

9.82 percent
B.

9.48 percent
C.

10.96 percent
D.

10.37 percent
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Answer #1

Ans c) 10.96 percent

State Probability Stock A Return Stock A Return * Probability Stock B Return Stock B Return * Probability Stock C Return Stock C Return * Probability
Boom 25.00% 19.00% 4.75% 13.00% 3.25% 7.00% 1.75%
Normal 72.00% 15.00% 10.80% 5.00% 3.60% 13.00% 9.36%
Bust 3.00% -29.00% -0.87% -14.00% -0.42% 22.00% 0.66%
Total 14.68% Total 6.43% Total 11.77%
Stock Probability Return Return * Probability
A 33.33% 14.68% 4.89%
B 33.33% 6.43% 2.14%
C 33.33% 11.77% 3.92%
Total 10.96%
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