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?

Sate of Economy	Probability of State of Economy	Return	If State	Occurs
		Stock A	Stock B	Stock C
Recession	.22	-14.8%	-1.9%	-20.8%
Normal	.47	11.0%	6.5%	15.1%
Boom	.31	24.6%	13.8%	29.7%

Options:

• 10.43%

• 11.79%

• 10.88%

• 9.98%

• 12.86%

Answer 1

weighted return probability expected return rate of return if state occurs state of economy (weight x return) weighted sum (sum of weighted return) Stock B -1.90% Stock C Stock A Stock B Stock C Stock A -0.48% 0.220 -3.21 % -10.40% -14.80% -20.80% -3.70% -14.58% Recession 0.470 Normal 15.10% 11.93% 11.00% 6.50% 2.75% 1.63% 7.55% 5.60% 6.15% 14.85% 3.45% 0.310 Boom 24.60% 13.80% 29.70% 24.45% 7.58% 9.98% Expected return Weight 25.00% 50.00% 25.00%