Question

You are the investment manager for a holding company that has 3 SBU’s to date. As part of your strategic planning you are calculating expected return for the company using scenario analysis data from your economic and marketing teams. What is the expected return for the portfolio using the data below?

Scenario	Scenario-economic	Return A	Return B	Return C
Boom	0.2	0.2	0.3	0.45
Normal	0.6	0.12	0.13	0.12
Decline	0.2	0	-0.1	-0.40
% of portfolio		0.4	0.35	0.25

Answer 1

first let us know the return A, B,C.

(scenario probability*return)

return A (0.2*0.2) +(0.6*0.12) +(0.2*0)	0.112
return B (0.2*0.3)+(0.6*0.13) +(0.2*(-0.1))	0.118
return c (0.2*0.45) + (0.6*0.12) +(0.2*(-0.40))	0.082

now expected return:

return *% of portfolio.

0.4*0.112 return A	0.0448
0.35*0.118 return B	0.0413
0.25*0.082 return C	0.0205
expected return	0.1066 (or)10.66%