Question

You decide to invest in a portfolio consisting of 25 percent Stock A, 25 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 .16 - 16.4 % - 2.7 % - 21.6 % Normal .55 12.6 % 7.3 % 15.9 % Boom .29 26.2 % 14.6 % 30.5 %

Answer 1

Stock A
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(A)^2* probability
Recession	0.16	-16.4	-2.624	-28.304	0.012817863
Normal	0.55	12.6	6.93	0.696	2.66429E-05
Boom	0.29	26.2	7.598	14.296	0.005926893
	Expected return %=	sum of weighted return =	11.9	Sum=Variance Stock A=	0.01877
			Standard deviation of Stock A%	=(Variance)^(1/2)	13.7
Stock B
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(B)^2* probability
Recession	0.16	-2.7	-0.432	-10.517	0.001769717
Normal	0.55	7.3	4.015	-0.517	1.47009E-05
Boom	0.29	14.6	4.234	6.783	0.001334264
	Expected return %=	sum of weighted return =	7.82	Sum=Variance Stock B=	0.00312
			Standard deviation of Stock B%	=(Variance)^(1/2)	5.58
Stock C
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(C)^2* probability
Recession	0.16	-21.6	-3.456	-35.734	0.0204307
Normal	0.55	15.9	8.745	1.766	0.000171532
Boom	0.29	30.5	8.845	16.366	0.007767533
	Expected return %=	sum of weighted return =	14.13	Sum=Variance Stock C=	0.02837
			Standard deviation of Stock C%	=(Variance)^(1/2)	16.84

Expected return%=	Wt Stock A*Return Stock A+Wt Stock B*Return Stock B+Wt Stock C*Return Stock C
Expected return%=	0.25*11.9+0.25*7.82+0.5*14.13
Expected return%=	12