Question

You decide to invest in a portfolio consisting of 30 percent Stock A, 30 percent Stock B, and the remainder in Stock C. Based on the following information, what is the expected return of your portfolio? State of Economy Recession Normal Probability of State of Economy .24 .44 .32 Return if State Occurs Stock A Stock B Stock C -14.2% - 1.6% -20.5% 10.4% 6.2% 14.8% 24.0% 13.5% 29.4% Boom

Answer 1

Solution :- Given in Question-

Investment in Portfolio,

Stock A = 30%

Stock B = 30%

Rest in stock C = 40%..

First we calculate Expected return on Individual security -

Stock A = -14.20 * 0.24 + 10.40 * 0.44 + 24 * 0.32 = 8.848%

Stock B = -1.60 * 0.24 + 6.20 * 0.44 + 13.50 * 0.32 = 6.664%

Stock C = -20.50 * 0.24 + 14.80 * 0.44 + 29.40 * 0.32 = 11%

Expected return on Portfolio is weighted Average Return.

Expected Return on Portfolio = 8.848% * 0.30 + 6.664% * 0.30 + 11% * 0.40

Expected return on Portfolio = 2.6544% + 1.9992% + 4.40%

Expected return on Portfolio = 9.05%

The current answer is point D i.e. 9.05%

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