Question

Problem 8-02

You are considering investing in three stocks with the following expected returns:

Stock A 7 %

Stock B 12

Stock C 19

a. What is the expected return on the portfolio if an equal amount is invested in each stock? Round your answer to two decimal places.

b. What would be the expected return if 54 percent of your funds is invested in stock A and the remaining funds are split evenly between stocks B and C? Round your answer to two decimal places.

Answer 1

Ans a) 12.67%

STOCK	Probability (P)	RETURN (Y)	(P * Y )
A	33.33%	7	2.33
B	33.33%	12	4.00
C	33.33%	19	6.33
		TOTAL	12.67
Expected Return =		(P * Y)
		12.67%

Ans b) 10.91%

STOCK	Probability (P)	RETURN (Y)	(P * Y )
A	54.00%	7	3.78
B	23.00%	12	2.76
C	23.00%	19	4.37
		TOTAL	10.91
Expected Return =		(P * Y)
		10.91%