An analyst has predicted the following returns for Stock A and Stock B in three

Question

An analyst has predicted the following returns for Stock A and Stock B in three possible states of the economy ProbabilityA Boom Normal Recession 0.23 0.40 0.22 0.19 0.17 0.22 0.16 0.10 a. What is the probability of a recession (Round your answer to 2 decimal places.) Probability b. Calculate the expected return of Stocks A and B. (Round your answers to 2 decimal places.) Expected Return Stocks A Stocks B c. Calculate the expected return of a portfolio that is invested 56% in A and 44% in B. (Round your answer to 2 decimal places.) Expected return

Explanation / Answer

Ans:

a)Probability of recession=1-0.23-0.4=0.37

b)Expected return for stock A=0.22*0.23+0.19*0.4+0.17*0.37=0.1895 or 18.95%

Expected return for stock B=0.22*0.23+0.16*0.4+0.1*0.37=0.1516 or 15.16%

c)Expected return of portfolio=0.56*0.1895+0.44*0.1516=0.1728 or 17.28%

State prob. A B Boom 0.23 0.22 0.22 Normal 0.4 0.19 0.16 Recession 0.37 0.17 0.1 Expected return 0.1895 0.1516

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