Question

Consider the following scenario analysis for stock X and Y. Assume that of your $10,000 portfolio, you invest $6,000 in X and the rest in Y. What is the expected return of your portfolio?

Bear Market Normal Market Bull Market
Probability 0.2 0.5 0.3
Stock X -20% 18% 50%
Stock Y -15% 20% 10%

Answer 1

Portfolio r(e) = 0.16 or 16%

Step-by-step explanation:

We can calculate the expected return of the portfolio by taking the weighted average of the expected return of the individual stocks that form up the portfolio. The formula for the expected return of portfolio is,

Portfolio r(e) = wA * rA + wB * rB + ... + wN * rN

Where,

• w is the weight of each stock in the portfolio
• r is the expected return of each stock

First we need to calculate the expected return of both X and Y.

Expected Return

r - X = 0.2 * -0.2 + 0.5 * 0.18 + 0.3 * 0.5

r - X = 0.2

r - Y = 0.2 * -0.15 + 0.5 * 0.2 + 0.3 * 0.1

r - Y = 0.1

Portfolio r(e) = 6000/10000 * 0.2 + 4000/10000 * 0.1

Portfolio r(e) = 0.16 or 16%