Question

In: Finance

Use the following scenario analysis for stocks X and Y to answer the questions. Bear Normal...

Use the following scenario analysis for stocks X and Y to answer the questions.

Bear Normal Bull
Market Market Market
Probability 20.00% 45.00% 35.00%
Stock X -13.00% 11.00% 28.00%
Stock Y -26.00% 16.00% 46.00%

Assume you have a $200,000 portfolio and you invest $75,000 in stock X and the remainder in stock Y. What is the expected return for this portfolio?

Solutions

Expert Solution

Probability (P) Stock X (Xi) Xi * P Stock Y (Yi) Yi * P
20% -13 -2.6 -26 -5.2
45% 11 4.95 16 7.2
35% 28 9.8 46 16.1
12.15 18.1
Therefore,
Expected return of Stock X = 12.15%
Expected return of Stock Y = 18.1%
If $75000 out of $200000 is invested in Stock X and the remainder in Stock Y,
Expected return of this portflio = 12.15 * ($75000/$200000) + 18.1 ($125000/$200000)
                                                                 = 4.56 + 11.31
                                                                 = 15.87%

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