Question

Use the following information about Ford and S&P 500 to solve the question below. State Probability...

Use the following information about Ford and S&P 500 to solve the question below.

State

Probability

S&P 500 return

Ford’s return

Recession

0.30

-18%

-22%

Normal

0.50

10%

12%

Boom

0.20

14%

20%

A. What is the expected return on the S&P 500?

B. What is the expected return in a recession of a portfolio of 70% S&P 500 and the remainder in Ford?

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Homework Answers

Answer #1

A

S&P
Scenario Probability Return% =rate of return% * probability
Recession 0.3 -18 -5.4
Normal 0.5 10 5
Boom 0.2 14 2.8
Expected return %= sum of weighted return = 2.4

B

Weight of S&P = 0.7
Weight of Ford = 0.3
Exp. Ret. of Portfolio = Weight of S&P*Exp. Ret. of S&P+Weight of Ford*Exp. Ret. of Ford
Exp. Ret. of Portfolio = -18*0.7+-22*0.3
Exp. Ret. of Portfolio = -19.2
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