Question

Consider the following information: state of economy probability of state of economy rate of return if state occurs stock a stock b stock c boom .65 .08 .02 .33 bust .35 .22 .28 -.13 what is the expected return on an equally weighted portfolio of these three stocks?

Answer 1

To find the expected return on an equally weighted portfolio of three stocks, we need to calculate the weighted average of the rate of return for each stock. The expected return can be found by multiplying each rate of return by its corresponding probability and then adding up the results. In this case, the stocks are equally weighted, so the probability of each stock occurring is 1/3 (or 0.33).

Step-by-step explanation:

To find the expected return on an equally weighted portfolio of three stocks, we need to calculate the weighted average of the rate of return for each stock. The expected return can be found by multiplying each rate of return by its corresponding probability and then adding up the results. In this case, the stocks are equally weighted, so the probability of each stock occurring is 1/3 (or 0.33).

Using the given information:

• Expected return of stock A = 0.08 * 0.33 = 0.0264
• Expected return of stock B = 0.28 * 0.33 = 0.0924
• Expected return of stock C = -0.13 * 0.33 = -0.0429

To find the overall expected return, we sum up these individual expected returns for the three stocks:

Overall expected return = 0.0264 + 0.0924 - 0.0429 = 0.0759 (or 7.59%)