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comjaf/servlet/quiz?quiz action-takeQuiz&quiz; probGuid-QNAPCOA801010000003e43132004666d&ctx; brownl-0012&ckem; 1. Statistical measures of standalone risk expected to occur during all possible circumstances. To compute an asset's expected return under a range of possible circumstances (or states of nature), multiply the anticipated return expected to result during each state of nature by its probability of occurrence. Consider the following case: Lan owns a two-stock portfolio that invests in Celestial Crane Cosmetics Company (CCC) and Lumbering Ox Truckmakers (LOT). Three-quarters of lan's portfolio value consists of CCC's shares, and the balance consists of LOT's shares. Each stock's expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailed in the following table: Market Condition Probability of Occurrence Celestial Crane Cosmetics Lumbering Ox Truckmakers 20% 35% 45% 45% 27% -36% 63% 36% -45% Normal Calculate expected returns for the individual stocks in lan's portfolio as well as the expected rate of return of the entire portfolio over the three possible market conditions next year The expected rate of return on Celestial Crane Cosmetics's stock over the next year is The expected rate of return on Lumbering Ox Truckmakers's stock over the next year is The expected rate of return on lan's portfolio over the next year is The expected returns for lan's portfolio were calculated based on three possible conditions in the market. Such 5 8 9

Explanation / Answer

market condition

probability

CCC return

probability*return

strong

20%

45%

9.00%

normal

35%

27%

9.45%

weak

45%

-36%

-16.20%

return on CCC

2.25%

market condition

probability

LOT return

probability*return

strong

20%

63%

12.60%

normal

35%

36%

12.60%

weak

45%

-45%

-20.25%

return on LOT

4.95%

return on portfolio

weight

return

weight*return

CCC

0.75

2.25%

0.016875

LOT

0.25

4.95%

0.012375

return on portfolio

2.93%

Company G has lower risk

market condition

probability

CCC return

probability*return

strong

20%

45%

9.00%

normal

35%

27%

9.45%

weak

45%

-36%

-16.20%

return on CCC

2.25%

market condition

probability

LOT return

probability*return

strong

20%

63%

12.60%

normal

35%

36%

12.60%

weak

45%

-45%

-20.25%

return on LOT

4.95%

return on portfolio

weight

return

weight*return

CCC

0.75

2.25%

0.016875

LOT

0.25

4.95%

0.012375

return on portfolio

2.93%

Company G has lower risk

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