Question

You decide to invest in a portfolio consisting of 35 percent Stock A, 35 percent Stock B, and the remainder in Stock C. Based on the following information, what is the expected return of your portfolio? State of Economy Probability of State Return if State Occurs of Economy

Stock A Stock B Stock C Recession .19 - 18.4 % - 3.7 % - 22.6 % Normal .53 10.6 % 8.3 % 16.9 % Boom .28 28.2 % 15.6 % 31.5 %

Answer 1

Stock A:
Economy	Probability	Return
	(P)	( R)	(P) *(R )
Recession	0.19	-0.184	-0.03496
Normal	0.53	0.106	0.05618
Boom	0.28	0.282	0.07896
Expected return			0.10018
Expected return of Stock A: 10.02%
Stock B
Economy	Probability	Return
	(P)	( R)	(P) *(R )
Recession	0.19	-0.037	-0.00703
Normal	0.53	0.083	0.04399
Boom	0.28	0.156	0.04368
Expected return			0.08064
Expected Return of Stock B: 8.06%
Stock C
Economy	Probability	Return
	(P)	( R)	(P) *(R )
Recession	0.19	-0.226	-0.04294
Normal	0.53	0.169	0.08957
Boom	0.28	0.315	0.0882
Expected return			0.13483
Expected Return of Stock C: 13.48%
expected return of Portfolio
	Exp Return	weights	Portfolio Return
StockA	10.02	0.35	3.507
StockB	8.06	0.35	2.821
Stock C	13.48	0.3	4.044
Portfolio return			10.37
Expected return of Portfolio = 10.37%
Answer is 10.37%