Question

Consider the following information: State Probability Stock A Stock B Stock C Boom 0.32 0.04 0.07 -0.09 Bust 0.68 0.11 0.19 -0.14 What is the expected return of a portfolio that has invested $7,406 in Stock A, $3,022 in Stock B, and $8,632 in Stock C? (Hint: calculate weights of each stock first). Enter the answer with 4 decimals (e.g. 0.1234).

Answer 1

To find the expected return of a portfolio, we need to calculate the weighted average of the returns of each stock. First, calculate the weights based on the investment amounts. Use the weights to calculate the expected return by multiplying the weights by the respective returns for each stock.

Step-by-step explanation:

To find the expected return of a portfolio, we need to calculate the weighted average of the returns of each stock. First, let's calculate the weights:

• Weight of Stock A = $7,406 / ($7,406 + $3,022 + $8,632)
• Weight of Stock B = $3,022 / ($7,406 + $3,022 + $8,632)
• Weight of Stock C = $8,632 / ($7,406 + $3,022 + $8,632)

Using these weights, we can calculate the expected return:

• Expected return = (Weight of Stock A * Return of Stock A) + (Weight of Stock B * Return of Stock B) + (Weight of Stock C * Return of Stock C)

Inserting the values:

• Expected return = (Weight of Stock A * 0.04) + (Weight of Stock B * 0.07) + (Weight of Stock C * -0.09)

Calculating this will give us the expected return of the portfolio.