A portfolio consists of 30 percent Stock A, 60 percent Stock B, and 10 percent S

Question

A portfolio consists of 30 percent Stock A, 60 percent Stock B, and 10 percent Stock C. What is the portfolio expected return given the following:

State of Economy

Probability of State of Economy

Stock A Returns

Stock B Returns

Stock C Returns

Normal

0.60

22%

   15%

   38%

Recession

0.40

2    

31

24

18.41 percent

14.18 percent

16.49 percent

17.88 percent

A portfolio consists of 30 percent Stock A, 60 percent Stock B, and 10 percent Stock C. What is the portfolio expected return given the following:

Explanation / Answer

Expected Return of Stock A = Prob of Normal * Return in Normal Econmy + Prob of Recession * Return in Recession Econmy

Expected Return of Stock A = 0.60*22 + 0.40*-2

Expected Return of Stock A = 12.40%

Expected Return of Stock B = Prob of Normal * Return in Normal Econmy + Prob of Recession * Return in Recession Econmy

Expected Return of Stock B = 0.60*15 + 0.40*31

Expected Return of Stock B = 21.40%

Expected Return of Stock C = Prob of Normal * Return in Normal Econmy + Prob of Recession * Return in Recession Econmy

Expected Return of Stock C = 0.60*38 + 0.40*-24

Expected Return of Stock C = 13.20%

Portfolio expected return = Weight of Stock A*Expeced Return of Stock A + Weight of Stock B*Expeced Return of Stock B + Weight of Stock C*Expeced Return of Stock C

Portfolio expected return = 30%*12.40 + 60%*21.40 + 10%*13.20

Portfolio expected return = 17.88%

Answer

17.88 Percent

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