Consider the following information: Rate of Return If State Occurs State of Probability of Economy State of Economy Stock A Stock B Stock C Boom .15 .37 .47 .27 Good .45 .22 .18 .11 Poor .35 −.04 −.07 −.05 Bust .05 −.18 −.22 −.08 a. Your portfolio is invested 20 percent each in A and C, and 60 percent in B. What is the expected return of the portfolio? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

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amcool amcool · Answer 1 · 2020-06-08T03:23:46+02:00

Answer:

2.41%

Explanation:

Note: The data in the question are merged and are first sorted before answering the question as follows:

a. Calculation of expected return of individual stock

Expected return of stock A = (0.15 * 0.45) + (0.37 * 0.22) + (0.47 * 0.18) + (0.27 * 0.11) = 0.26

Expected return of stock B = (0.15 * 0.35) + (0.37 * (−0.04)) + (0.47 * (−0.07)) + (0.27 * (−0.07)) = −0.01

Expected return of stock C = (0.15 * 0.05) + (0.37 * (−0.18)) + (0.47 * (−0.22)) + (0.27 * (−0.08)) = −0.12

b. Calculation of expected return of the portfolio

This is the sum of the product of expected return of individual stock and percentile invested in each stock as follows:

Expected return of portfolio = (0.26 * 20%) + (−0.01 * 60%) + (−0.12 * 20%) = 0.0241, or 2.41%