Ian owns a two-stock portfolio that invests in Blue Llama Mining Company (BLM) and Hungry Whale Electronics (HWE). Three-quarters of Ian's portfolio value consists of BLM's shares, and the balance consists of HWE's shares. Each stock's expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailed in the following table: Market Condition Probability of Occurrence Blue Llama Mining Hungry Whale Electronics Strong 0.50 27.5% 38.5% Normal 0.25 16.5% 22% Weak 0.25 -22% -27.5% Calculate expected returns for the individual stocks in Ian's portfolio as well as the expected rate of return of the entire portfolio over the three possible market conditions next year. • The expected rate of return on Blue Llama Mining's stock over the next year is • The expected rate of return on Hungry Whale Electronics's stock over the next year is • The expected rate of return on Ian's portfolio over the next year is The expected returns for Ian's portfolio were calculated based on three possible conditions in the market. Such conditions will vary from time to time, and for each condition there will be a specific outcome. These probabilities and outcomes can be represented in the form of a continuous probability distribution graph. PROBABILITY DENSITY Company G Company H -40 -20 20 40 60 RATE OF RETURN (Percent) Based on the graph's information, which company's returns exhibit the greater risk? Company H Company G
Ian owns a two-stock portfolio that invests in Blue Llama Mining Company (BLM) and Hungry Whale Electronics (HWE). Three-quarters of Ian's portfolio value consists of BLM's shares, and the balance consists of HWE's shares. Each stock's expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailed in the following table: Market Condition Probability of Occurrence Blue Llama Mining Hungry Whale Electronics Strong 0.50 27.5% 38.5% Normal 0.25 16.5% 22% Weak 0.25 -22% -27.5% Calculate expected returns for the individual stocks in Ian's portfolio as well as the expected rate of return of the entire portfolio over the three possible market conditions next year. • The expected rate of return on Blue Llama Mining's stock over the next year is • The expected rate of return on Hungry Whale Electronics's stock over the next year is • The expected rate of return on Ian's portfolio over the next year is The expected returns for Ian's portfolio were calculated based on three possible conditions in the market. Such conditions will vary from time to time, and for each condition there will be a specific outcome. These probabilities and outcomes can be represented in the form of a continuous probability distribution graph. PROBABILITY DENSITY Company G Company H -40 -20 20 40 60 RATE OF RETURN (Percent) Based on the graph's information, which company's returns exhibit the greater risk? Company H Company G
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Ian owns a two-stock portfolio that invests in Blue Llama Mining Company (BLM) and Hungry Whale Electronics (HWE). Three-quarters
of Ian's portfolio value consists of BLM's shares, and the balance consists of HWE's shares.
Each stock's expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in
different market conditions are detailed in the following table:
Market Condition
Probability of Occurrence
Blue Llama Mining
Hungry Whale Electronics
Strong
0.50
27.5%
38.5%
Normal
0.25
16.5%
22%
Weak
0.25
-22%
-27.5%
Calculate expected returns for the individual stocks in Ian's portfolio as well as the expected rate of return of the entire portfolio over the three
possible market conditions next year.
• The expected rate of return on Blue Llama Mining's stock over the next year is
• The expected rate of return on Hungry Whale Electronics's stock over the next year is
• The expected rate of return on Ian's portfolio over the next year is
The expected returns for Ian's portfolio were calculated based on three possible conditions in the market. Such conditions will vary from time to time,
and for each condition there will be a specific outcome. These probabilities and outcomes can be represented in the form of a continuous probability
distribution graph.
Transcribed Image Text:PROBABILITY DENSITY
Company G
Company H
-40
-20
20
40
60
RATE OF RETURN (Percent)
Based on the graph's information, which company's returns exhibit the greater risk?
Company H
Company G
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