State of Economy Probability of State Stock A Stock B Stock C
Boom .10 22% 18% 5%
Normal .85 14% 13% 11%
Recession .05 -28% 4% 17%
4. You have a portfolio that is equally weighted among stocks A, B, and C. What is the
expected return on your portfolio?
a. 11.87 percent
b. 12.15 percent
c. 12.22 percent
d. 12.48 percent
To calculate the expected rate of return on the portfolio, we first calculate the expected return under each state of economy.
Since the stock are equally weighted, the proportion is 1/3 each
The solution explains how to calculate the expected rate of return on the portfolio.