Question

You decide to invest in a portfolio consisting of 25 percent stock a, 25 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 probability of state of economy return if state occurs stock a stock b stock c recession .17 -15.4% -2.2% -21.1% normal .50 11.6% 6.8% 15.4% boom .33 25.2% 14.1% 30.0% multiple choice

O 13.95%
O 11.80%
O 12.87%
O 12.34%
O 15.21%

Answer 1

To find the expected return of a portfolio, multiply the probability of each state of the economy by the return of each stock in that state and then sum up the results.

Step-by-step explanation:

To find the expected return of the portfolio, we need to multiply the probability of each state of the economy by the return of each stock in that state and then sum up the results. Let's calculate it:

1. In the recession state, the expected return for stock A would be 0.17 * -15.4% = -2.6%.
2. In the normal state, the expected return for stock A would be 0.50 * 11.6% = 5.8%.
3. In the boom state, the expected return for stock A would be 0.33 * 25.2% = 8.3%.
4. Similarly, calculate the expected returns for stocks B and C in each state of the economy.
5. The final expected return of the portfolio is the weighted sum of these expected returns: (0.25 * expected return of stock A) + (0.25 * expected return of stock B) + (0.50 * expected return of stock C).
6. Substituting the values, we get (0.25 * 5.8%) + (0.25 * 6.8%) + (0.50 * 15.4%) = 1.45% + 1.7% + 7.7% = 10.85%.

Therefore, the expected return of your portfolio is 10.85%.