In: Finance
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).
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)