Ethan owns a two-stock portfolio that invests in Blue Llama Mining Company (BLM)

Question

Ethan owns a two-stock portfolio that invests in Blue Llama Mining Company (BLM) and Hungry Whale Electronics (HWE). Three-quarters of Ethan's portfolio value consists of BLM's shares, and the balance consists of HWE'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:

Calculate expected returns for the individual stocks in Ethan's portfolio as well as the expected rate of return of the entire portfolio over the 3 possible market conditions.

1. The expected rate of return on BLM stock over next year is: a. 6.08% b. 5.40% c. 3.83% d. 4.50%

2. The expected rate of return on HWE stock over next year is: a. 7.35% b. 8.06% c. 6.50% d. 4.23%

3. The expected rate of return on Ethan's portfolio over next year is: a. 6.75% b. 5.00% c. 4.25% d. 6.00%

Market Condition Probability of Occurence Blue Llama Mining Hungry Whale Electro Strong 50% 10% 14% Normal 25% 6% 8% Weak 25% -8% -10%

Explanation / Answer

Scenario Probability Blue Llama Mining Retrun* Probability Hungry Whale Electro Retrun* Probability Strong 50% 10% 5.000% 14% 7.000% Normal 25% 6% 1.500% 8% 2.000% Week 25% -8% -2.000% -10% -2.500% Expected return 4.500% Expected return 6.500% Expected return Weight Return Blue Llama Mining 4.500% 75% 3.375% Hungry Whale Electro 6.500% 25% 1.625% Expected return 5.000% Solution 1 4.500% Solution 2 6.500% Solution 3 5.000%

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