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? note: do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.

Answer 1

The expected return for an equally weighted portfolio is calculated by averaging the returns of each stock for both economic states, weighted by the probability of each state.

Step-by-step explanation:

The student's question involves calculating the expected return on an equally weighted portfolio consisting of three stocks with varying rates of return depending on two economic states: boom and bust. To find the expected return, we need to multiply the return rate of each stock by the probability of each economic state and then take the average of the three stocks' returns for that state. This is done for both economic states, and the results are then added together to get the final expected return for the portfolio.

Using the provided probabilities and rates of returns for Stock A, B, and C:

• Expected return in boom state = (0.08 + 0.02 + 0.33)/3 * 0.65
• Expected return in bust state = (0.22 + 0.28 - 0.13)/3 * 0.35

The final expected return of the portfolio is the sum of the expected returns for both states.