Given the following information, what is the expected return on a portfolio that
ID: 2669255 • Letter: G
Question
Given the following information, what is the expected return on a portfolio that is invested 35 percent in
Stock A, 45 percent in stock B, and the balance in Stock C?
state of probability of rate of return if state occurs
economy state of economy stock A stock B Stock C
boom .20 11.4 31.2 7.3
normal .75 8.7 17.6 8.1
recession .05 -3.4% -37.6% 9.9%
Explanation / Answer
Return from A = (0.20*11.4) + (0.75*8.7) + (0.05*-3.4) = 8.635% Return from B = (0.20*31.2) + (0.75*17.6) + (0.05*-37.6) = 17.56% Return from C = (0.20*7.3) + (0.75*8.1) + (0.05*9.9) = 8.03% Expected return from portfolio = weighted average return = 8.635*0.35 + 17.56*0.45 + 8.03* 0.20 = 12.53%