Question

Consider the following information:

State Probability Stock A Stock B Stock C

Boom 0.32 -0.03 0.07 -0.15

Bust 0.68 0.06 -0.01 0.21

What is the expected return of a portfolio that has invested $16300 in Stock A, $12200 in Stock B, and   $9500 in Stock C? (Hint: calculate weights of each stock first). Enter the answer with 4 decimals (e.g. 0.1234).

Answer 1

The correct answer is 0.0421

Note :

1. Expected Returns

		Returns
State	Probability	Stock A	Stock A Return * Probability	Stock B	Stock B Return * Probability	Stock C	Stock C Return * Probability
Boom	0.32	-0.03	-0.0096	0.07	0.0224	-0.15	-0.048
Bust	0.68	0.06	0.0408	-0.01	-0.0068	0.21	0.1428
			0.0312		0.0156		0.0948

2. expected return of a portfolio:

	Value	Weight ( value / Total Value)	Expected Returns	Weight * Expected Returns
Stock A	16,300	0.428947368	0.0312	0.013383158
Stock B	12,200	0.321052632	0.0156	0.005008421
Stock C	9,500	0.25	0.0948	0.0237
	38,000			0.0421