A portfolio consists of 36 percent Stock A, 55 percent Stock B, and 9 percent St

Question

A portfolio consists of 36 percent Stock A, 55 percent Stock B, and 9 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

.90

28%

   21%

   50%

Recession

.10

–2    

43

–24

24.20 percent

25.59 percent

26.12 percent

21.89 percent

A portfolio consists of 36 percent Stock A, 55 percent Stock B, and 9 percent Stock C. What is the portfolio expected return given the following:

Explanation / Answer

Expected return =Respective returns*Respective probabilities

Expected return for:

A=(0.9*28)+(0.1*-2)=25%

B=(0.9*21)+(0.1*43)=23.2%

C=(0.9*50)+(0.1*-24)=42.6%

Hence expected return for portfolio=(25*0.36)+(23.2*0.55)+(42.6*0.09)

=25.59%(Approx)(B)

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