Homework Soursealculate the expected return on a portfolio which is investe
alculate the expected return on a portfolio which is invested 20 percent in stock A, 45 percent in stock B, and the remainder in stock C?
| Returns if State Occurs | ||||
|---|---|---|---|---|
| State of Economy | Probability of State of Economy | Stock A | Stock B | Stock C |
| Boom | 5% | 18% | 8% | 7% |
| Normal | 50% | 10% | 9% | 12% |
| Recession | 45% | -27% | 4% | 22% |
Solution
return = sum of (weight * return for each state)
expected return = sum of column 3 = 7.45%
| p(x) | return | p*x |
| 0.05 | 9.7% | 0.004825 |
| 0.5 | 10.3% | 0.05125 |
| 0.45 | 4.1% | 0.01845 |
