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26. There are three stocks, A, B, and C. You can either invest in these stocks or short sell them. There are three possible states of nature for economic growth in the upcoming year; economic growth may be strong, moderate, or weak. The returns for the upcoming year on stocks A, B, and C for each of these states of nature are given below:

Stock State of Nature Strong Growth 39% 30% 6% Moderate Growth 17% 15% 14% Weak Growth -5% 0% 22

If you invested in an equally weighted portfolio of stocks A and B, your portfolio return would be ___________ if economic growth were moderate.

Group of answer choices

3.0%

14.5%

15.5%

16.0%

none of the above

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Answer #1

The portfolio return is computed as shown below:

= 50% x Return on stock A in moderate economic growth + 50% x Return on stock B in moderate economic growth

= 0.50 x 0.17 + 0.50 x 0.15

= 16.0%

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