Question

Ch 08: Assignment - Risk and Rates of Return Remember, the expected value of a probability distribution is a statistical measure of the average (mean) value expected to occur during all possible circumstances. To compute an asset's expected return under a range of possible circumstances (or states of nature), multiply the anticipated return expected to result during each state of nature by its probability of occurrence. Consider the following case: David owns a two-stock portfolio that invests in Falcon Freight Company (FF) and Pheasant Pharmaceuticals (PP). Three-quarters of David's portfolio value consists of FF's shares, and the balance consists of PP's shares Each stock's expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailed in the following table: Market Condition Falcon Freight 22.5% Strong Normal Weak Probability of Occurrence 0.20 0.35 0.45 Pheasant Pharmaceuticals 31.5% 18% -22.5% 13.5% -18% Calculate expected returns for the individual stocks in David's portfolio as well as the expected rate of return of the entire portfolio over the three possible market conditions next year • The expected rate of return on Falcon Freight's stock over the next year is • The expected rate of return on Pheasant Pharmaceuticals's stock over the next year is • The expected rate of return on David's portfolio over the next year is

Answer 1

Calculate the expected return as follows:

ДА В C D E F G 322 Expected return 323 Market condition Probability Happy Black sheep Happy Black sheep 324 Strong 0.20 22.50% 31.50% 4.500% 6.300% 325 Normal 0.35 13.50% 18.00% 4.725% 6.300% 326 Weak 0.45 -18.00% -22.50% -8.100% -10.125% 327 Expected return on Dog soaps 1.13% 328 Expected return on Black sheep 2.48% 329 Joshusa portfolio 1.46% 330 Company H. Graph H has greater negative return.

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