Question

Q Search this course Risk and Rates of Return Tyler owns a two-stock portfolio that invests in Falcon Freight Company (FF) and Pheasant Pharmaceuticals (PP). Three-quarters of Tyler's portfolio value consists of FF's shares, and the balance consists of PP's shares. Each stock's expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailed in the following table: Market Condition Probability of Occurrence Falcon Freight Pheasant Pharmaceuticals Strong 0.20 50% 70% Normal 0.35 30% 40% Weak 0.45 -40% -50% Calculate expected returns for the individual stocks in Tyler's portfolio as well as the expected rate of return of the entire portfolio over the possible market conditions next year The expected rate of return on Falcon Freight's stock over the next year is The expected rate of return on Pheasant Pharmaceuticals's stock over the next year is The expected rate of return on Tyler's portfolio over the next year is were calculated based on three possible conditions in the market. Such conditions will varv from 10/29/2019 753 PM The expected returns for Tvler's portfolio DELL wert Priscr F12 F10

Answer 1

Expected Rate of Return on Falcon Freight's Stock =0.20*50%+0.35*30%+0.45*-40% =2.50%
Expected Rate of Return on Pheasant Pharmaceutical Stock =0.20*70%+0.35*40%+0.45*-50% =5.50%

Expected Return of Portfolio =0.20*(3/4*50%+1/4*70%)+0.35*(3/4*30%+1/4*40%)+0.45*(3/4*-40%+1/4*-50%)=3.25%