Consider the following information: State Probability Stock A Stock B Stock C Boom 0.32 0.07 0.04...

Consider the following information:

State Probability Stock A Stock B Stock C

Boom 0.32 0.07 0.04 0.08

Bust 0.68 0.11 0.03 0.12

What is the expected return of a portfolio that has invested $3,235 in Stock A, $15,297 in Stock B, and $6,349 in Stock C? (Hint: calculate weights of each stock first). Enter the answer with 4 decimals (e.g. 0.1234).

Expert Solution

Investment in Stock A = $3,235
Investment in Stock B = $15,297
Investment in Stock C = $6,349

Total Investment = Investment in Stock A + Investment in Stock B + Investment in Stock C
Total Investment = $3,235 + $15,297 + $6,349
Total Investment = $24,881

Weight of Stock A = Investment in Stock A / Total Investment
Weight of Stock A = $3,235 / $24,881
Weight of Stock A = 0.1300

Weight of Stock B = Investment in Stock B / Total Investment
Weight of Stock B = $15,297 / $24,881
Weight of Stock B = 0.6148

Weight of Stock C = Investment in Stock C / Total Investment
Weight of Stock C = $6,349 / $24,881
Weight of Stock C = 0.2552

Boom:

Expected Return = 0.1300 * 0.07 + 0.6148 * 0.04 + 0.2552 * 0.08
Expected Return = 0.054108

Bust:

Expected Return = 0.1300 * 0.11 + 0.6148 * 0.03 + 0.2552 * 0.12
Expected Return = 0.063368

Expected Return of Portfolio = 0.32 * 0.054108 + 0.68 * 0.063368
Expected Return of Portfolio = 0.0604

jeff jeffy answered 4 months ago

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