Question

A portfolio consists of $15,000 in Stock M and $22,900 invested in Stock N. The expected return on these stocks is 8.80 percent and 12.40 percent, respectively. What is the expected return on the portfolio?

11.69%

10.22%

10.98%

10.60%

9.37%

You decide to invest in a portfolio consisting of 30 percent Stock A, 30 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			Return if State Occurs
	of Economy			Stock A			Stock B			Stock C
Recession		.20		-	18.2	%	-	3.6	%	-	22.5	%
Normal		.51			10.8	%		8.2	%		16.8	%
Boom		.29			28.0	%		15.5	%		31.4	%

10.65%

11.14%

13.73%

12.59%

11.62%

Answer 1

Question 1

A portfolio consists of $15,000 in Stock M and $22,900 invested in Stock N.

Return on Stock M = 15000 X 8.8% = 1320

Return on Stock N = 22900 x 12.40% = 2840

Portfolio return = ( 1320 + 2840 ) / 37900 = 10.98%

Question 2

We need to find the return of the portfolio in each state of the economy. To do this, we will multiply the return of each asset by its portfolio weight and then sum the products to get the portfolio return in each state of the economy. Doing so, we get: Boom: E(R p ) = 0.30(0.28) + 0.30(0.155) + .0.40(0.314)                E(R p ) = 0.2561 or 25.61% Normal: E(R p ) = 0.30(0.108) + 0.30(0.082) + 0.40(0.168)                   E(R p ) = 0.1242 or 12.42% Bust: E(R p ) = 0.30(-0.182) + 0.30(-0.036) + 0.40(–0.225)                E(R p ) = –0.1554 or –15.54% And the expected return of the portfolio is: E(R p ) = 0.29(0.2561) + 0.51(0.1242) + 0.20(–0.1554) E(R p ) = 0.1065 or 10.65%