Intro The table below shows the expected rates of return for three stocks and their weights in som portfolio: State Recession Normal Boom Portfolio weights Probability 0.2 0.5 0.3 Stock A 0.5 0.02 0.05 0.1 Stock B 0.2 Expected returns 0.04 0.08 0.1 Stock C 0.3 -0.04 0.03 0.11
Intro The table below shows the expected rates of return for three stocks and their weights in som portfolio: State Recession Normal Boom Portfolio weights Probability 0.2 0.5 0.3 Stock A 0.5 0.02 0.05 0.1 Stock B 0.2 Expected returns 0.04 0.08 0.1 Stock C 0.3 -0.04 0.03 0.11
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:What is the expected portfolio return?
5.71%
Correct ✔
The portfolio return in each state is the weighted average of the individual expected returns:
E(Rp, recession) = WA E(RA, recession) + WB E(RB, recession) + wc E(Rc, recession)
= 0.5 * 0.02 +0.2 * 0.04 + 0.3 * -0.04
= 0.006
E(RP, normal) = WA E(RA, normal) + WB E(RB, normal) + wc E(Rc, normal)
= 0.5 * 0.05 + 0.2 * 0.08 + 0.3 * 0.03
= 0.05
E(Rp, boom) = WA E(RA, boom) + WB E(RB, boom) + wc E(Rc, boom)
= 0.5 * 0.1 +0.2 * 0.1 +0.3 * 0.11
= 0.103
The expected portfolio return is the weighted average of the portfolio returns during a recession
and a boom:
E(Rp) = Precession E(Rp, recession) + Pnormal E(Rp, normal) + Pboom E(Rp, boom)
= 0.2 0.006 + 0.5 * 0.05 + 0.3 * 0.103
= 0.0571
Transcribed Image Text:Intro
The table below shows the expected rates of return for three stocks and their weights in some
portfolio:
State
Recession
Normal
Boom
Stock A
Portfolio weights 0.5
Probability
0.2
0.5
0.3
0.02
0.05
0.1
Stock B
0.2
Expected returns
0.04
0.08
0.1
Stock C
0.3
-0.04
0.03
0.11
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