Consider the following information: State Probability Stock A Stock B Stock C Boom 0.65 0.08 -0.1...

Consider the following information:

State Probability Stock A Stock B Stock C

Boom 0.65 0.08 -0.1 0.18

Bust 0.35 0.09 -0.06 -0.08

What is the expected return on an equally weighted portfolio of these three stocks? (Hint: Equally means that each stock has the same weight. Given that there are only 3 stocks, each has a weight of 1/3) Enter the answer with 4 decimals (e.g. 0.1234).

Solutions

Expert Solution

Expected return=Respective return*Respective probability

Expected return for:

A=(0.65*0.08)+(0.35*0.09)=0.0835

B=(0.65*-0.1)+(0.35*-0.06)=-0.086

C=(0.65*0.18)+(0.35*-0.08)=0.089

Portfolio return=Respective return*Respective weight

=(0.0835*1/3)+(-0.086*1/3)+(0.089*1/3)

=0.0288(Approx)

jeff jeffy answered 2 years ago

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