Question

There are three stocks, A, B, and C. You can either invest in these stocks or short sell them. There are three possible states of nature for economic growth in the upcoming year; economic growth may be strong, moderate, or weak. The returns for the upcoming year on stocks A, B, and C for each of these states of nature are given below: State of Nature Stock Strong Growth Moderate Growth Weak Growth 39% 30% 17% 1 5% 14% 0% 22% If you invested in an equally weighted portfolio of stocks A and C, your portfolio return would be if economic growth was strong.

a 17.0%
b 22.5%
c 30.0%
d 30.5%
e none of the above

Answer 1

b 22.5%

Step-by-step explanation:

The computation of the portfolio return is shown below:

Since it is mentioned that the invested should be made on equally basis so the weightage of strong Stock A and Stock C is 50% and the same is given below:

= (Strong growth stock A returns × weightage) + (Strong growth stock C returns × weightage)

= (39% × 50%) + (6% × 50%)

= 19.50% + 3%

= 22.50%

We simply added the both Stock A and stock C so that the portfolio return could arrive