Question

1. Statistical measures of standalone A Aa Remember, the expected value of a probabilit expected to occur during all possible circumstances (or states of its probability of occurrence OE measure of the average (mean) value expected return under a range of possible ed to result during each state of nature by EU Consider the following case: Tyler owns a two-stock portfolio that in (HWE). Three-quarters of Tyler's portfolio value Mining Company (BLM) and Hungry Whale Electronics BLM's shares, and the balance consists of HWE's shares. 5 Each stock's expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market cond in the following table: - 95 - rence Blue Llama Mining Hungry Whale Electronics Market Condition Probability Strong Normal 35% Weak 11% 14% 14% -18% 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 three possible market conditions next year. • The expected rate of return on Blue Lama Mining's stock over the next year is • The expected rate of return on Hungry Whale Electronics's stock over the next year • The expected rate of return on Tyler's portfolio over the next year is

Answer 1

The Expected Rate of return on Blue Llama Mining stock over the next year

Expected Return = Sum of [Returns x Probability]

= [18.00% x 0.20] + [11.00% x 0.35] + [-14.00% x 0.45]

= 3.60% + 3.85% - 6.30%

= 1.15%

The Expected Rate of return on Hungry Whales Electronics stock over the next year

Expected Return = Sum of [Returns x Probability]

= [25.00% x 0.20] + [14.00% x 0.35] + [-18.00% x 0.45]

= 5.00% + 4.90% - 8.10%

= 1.80%

The expected rate of return on Tylor’s portfolio over the next year

Expected Return = [Expected Rate of return on Blue Llama x Proportion of the Investment in Blue Llama] + [Expected Rate of return on Hungry Whales Electronics stock x Proportion of the Investment in Hungry Whales Electronics]

= [1.15% x ¾] + [1.80% x ¼]

= 0.86% + 0.45%

= 1.31%