Question

Aaron owns a two-stock portfolio that invests in Blue Llama Mining Company (BLM) and Hungry Whale Electronics (HWE). Three- quarters of Aaron's portfolio value consists of BLM's shares, and the balance consists of HWE'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: Blue Llama Mining Market Condition Probability of Occurrence Hungry Whale Electronics 21% Strong 25% 15% Normal 45% 9% 12% Weak 30% -12% -15% alculate expected returns for the individual stocks in Aaron's portfolio as well as the expected rate of return of the entire portfolio over the three ossible market conditions next year. The expected rate of return on Blue Llama Mining's stock over the next year is The expected rate of return on Hungry Whale Electronics's stock over the next year is The expected rate of return on Aaron's portfolio over the next year is

Answer 1

State of Economy	Probability of Economy(X)	Stock B	Stock H
strong	0.25	15.00%	21.00%
normal	0.45	9.00%	12%
weak	0.3	-12%	-15.00%
Expected return E(X)=sum of(x*P(X))		4.20%	6.15%

Expected return on B = 4.2$

Expected return on H = 6.15%

Expected return of portfolio

= 3/4 * 4.25% + 1/4 * 6.15%

= 4.73%

2)

Company A has smaller standard deviation , since its rate of returns are distributed over a small range