Question

Ian owns a two-stock portfolio that invests in Blue Llama Mining Company (BLM) and Hungry Whale Electronics (HWE). Three-quarters of Ian’s portfolio value consists of BLM’s shares, and the balance consists of HWE’s shares.

Each stock’s expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailed in the following table:

Market Condition	Probability of Occurrence	Blue Llama Mining	Hungry Whale Electronics
Strong	0.25	10%	14%
Normal	0.45	6%	8%
Weak	0.30	-8%	-10%

Calculate expected returns for the individual stocks in Ian’s portfolio as well as the expected rate of return of the entire portfolio over the three possible market conditions next year.

•	The expected rate of return on Blue Llama Mining’s stock over the next year is     .
•	The expected rate of return on Hungry Whale Electronics’s stock over the next year is     .
•	The expected rate of return on Ian’s portfolio over the next year is     .

Answer 1

Therefore, expected return on BLM's shares = 2.80%

Expected return of HWE's shares = 4.10%

Portfolio return = (Return of Asset A*Weight of Asset A) + (Return of Asset B*Weight of Asset B)

Therefore, portfolio return of the two stock portfolio = 2.80*(3/4) + 4.10*(1/4)

= 2.10 + 1.025

= 3.125%