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

ID: 3071351 • Letter: A

Question

An analyst has predicted the following returns for Stock A and Stock B in three possible states of the economy.

a. What is the probability of a recession? (Round your answer to 2 decimal places.)

b. Calculate the expected return for Stock A and Stock B. (Round your answers to 2 decimal places.)

c. Calculate the expected return for a portfolio that is invested 42% in A and 58% in B. (Round your answer to 2 decimal places.)

State Probability A B Boom 0.25 0.24 0.27 Normal 0.49 0.16 0.20 Recession ? 0.10 0.17

a.) the prob of recession= 1- (0.25+0.49) = 0.26

b.) expected return for A = 0.24*0.25 +0.49*0.16 + 0.26*0.10 = 0.06+ 0.0784+0.026 = 0.16

expected return for B = 0.27*0.25 +0.49*0.20+ 0.26*0.17 = 0.0675 + 0.098 +0.0442 = 0.21

c.) expected return for a portfolio that is invested 42 % in A and 58% in B= 0.42*0.16+0.58*0.21 = 0.0672 + 0.1218 = 0.19