Question

You decide to invest in a portfolio consisting of 25 percent Stock A, 25 percent Stock B, and the remainder in Stock C. Based on the following information, what is the expected return of your portfolio? State of Economy Probability of State of Economy .18 .54 Recession Normal Boom Return if State Occurs Stock A Stock B Stock C - 16.2% - 2.6% -21.5% 12.4% 7.2% 15.8% 26.0% 14.5% 30.4% Multiple Choice 0 11.73% 0 12.24% 0 11.22% 0 14.47% 0 13.26%

Answer 1

Expected Return on Stock = Sum of Probability*Expected Return

Stock A = -16.2%*0.18 + 12.4%*0.54 + 26%*0.28 = 11.06%

Stock B = -2.6%*0.18 + 7.2%*0.54 + 14.5%*0.28 = 7.48%

Stock C = 13.174%

Expected Return on portfolio is equal to weighted average return

= 25%*11.06% + 25%*7.48% + 50%*13.174%

= 11.222%

Hence, the answer is 11.22%