Given the following information, what is the expected return on a portfolio that

Question

Given the following information, what is the expected return on a portfolio that is invested 35 percent in
Stock A, 45 percent in stock B, and the balance in Stock C?

state of        probability of             rate of return if state occurs
economy       state of economy       stock A stock B Stock C

boom             .20                           11.4      31.2       7.3
normal           .75                            8.7       17.6       8.1
recession        .05                         -3.4%     -37.6%    9.9%

Explanation / Answer

Return from A = (0.20*11.4) + (0.75*8.7) + (0.05*-3.4) = 8.635% Return from B = (0.20*31.2) + (0.75*17.6) + (0.05*-37.6) = 17.56% Return from C = (0.20*7.3) + (0.75*8.1) + (0.05*9.9) = 8.03% Expected return from portfolio = weighted average return = 8.635*0.35 + 17.56*0.45 + 8.03* 0.20 = 12.53%

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