What is the expected return of a portfolio that has invested $14,744 in Stock A, $9,716 in Stock B, and $16,880 in Stock C?

Consider the following information:

State Probability Stock A Stock B Stock C

Boom 0.32 -0.09 0.17 0.18

Bust 0.68 -0.07 0.04 -0.02

What is the expected return of a portfolio that has invested $14,744 in Stock A, $9,716 in Stock B, and $16,880 in Stock C? (Hint: calculate weights of each stock first). Enter the answer with 4 decimals (e.g. 0.1234).

Expert Solution

Expected return=Respective return*Respective probability

Expected return for:

A=(0.32*-0.09)+(0.68*-0.07)=-0.0764

B=(0.32*0.17)+(0.68*0.04)=0.0816

C=(0.32*0.18)+(0.68*-0.02)=0.044

Total value=(14,744+9,716+16,880)=$41340

Portfolio return=Respective return*Respective weight

=(14,744/41340*-0.0764)+(9,716/41340*0.0816)+(16,880/41340*0.044)

=0.0099(Approx)

jeff jeffy answered 2 years ago

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