Question

Given the following information about the returns of stocks A, B, and C, what is the expected return of a portfolio invested 30% in stock A, 40% in stock B, and 30% in stock C?

State of economy	Probability	Stock A	Stock B	Stock C
Boom	0.16	0.35	0.2	0.25
Good	0.29	0.17	0.2	0.13
Poor	0.21	0.01	0.03	0.08
Bust	--	-0.16	-0.19	-0.18

Enter answer in percents.

Answer 1

weighted return (weight x return) state of econom rate of return if state occurs weighted sum probability expected return Stock A Stock B Stock C Stock A Stock B Stock C (sum of weighted return 10.500%18.000%) 5.100%) 8.000%) 0.300%) 1.200%) -4.800%)-7.600% 7.500% 3.900% 2.400% -5.400% 26.000% 17.000% 3.900% 17.800% 4.16% 4.93% 0.82% 6.05% 3.86% Boom Good Poor Bust 0.35 0.17 0.01 0.16 0.20 0.20 0.03 0.19 0.25 0.13 0.08 0.18 0.16 0.29 0.21 0.34 Weight 30.00% 40.00% 30.00% answer: a) Expected return 3.86%